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How to Decide What Mutual Funds to Buy

What mutual funds do you select?

 

If you’re trying to build a diversified portfolio, buying mutual funds is an essential part of that. Mutual funds are great because they are, themselves, diversified, since they invest in a basket of stocks that match a certain criteria.

For example, you could have an S&P500 mutual fund, which invests in the stocks of the S&P 500.

However, when deciding what mutual funds to buy for your portfolio, you should build a basket of diversified funds, so that your overall portfolio has diversity of different asset classes.

 

Different Types of Mutual Funds

There are thousands of different mutual funds out there, but most of them fall into specific fund categories. This makes it easier when deciding what mutual funds to buy, since you can select funds by class. There are three main varieties of mutual funds: equity funds (invest in stocks), fixed income funds (invest in bonds), and money market funds (invest in cash).

Beyond that, you can break it down even father.

For equity funds, you have the following types:

 

  • Large Cap (invests in large companies)
     
  • Mid Cap (invests in medium-sized companies)
     
  • Small Cap (invests in small companies)
     
  • Value (invests in companies that are value)
     
  • Blend (invests in a mix of company times)
     
  • Growth (invests in growth companies)

 

For fixed income funds, you have the following types:

 

  1. Government
     
  2. Corporate
     
  3. Foreign

 

There are also many types of specialty funds, but those should be considered specialty, and not necessarily a key part of a diversified portfolio.

 

Building a Diversified Portfolio

Now that you have the main types of mutual funds, you have to decide what mutual funds to buy. You should take the above mentioned types, and put them together to get a balanced portfolio.

Many people choose a mix of stocks and bonds, with stocks being heavily weighted when you’re young, and bonds increasing in weight as you age. You should also mix both small and large companies, as well as growth and value companies.

By diversifying your portfolio, you can ensure that you will have stable results over time.

 

Find here more of our “Buy Mutual Funds” articles.
 

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