Types of Funds

Types of Funds — The many categories are mutual

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Types of Funds — The many categories are mutual

Mutual funds invest in baskets of individual investments. Mutual funds and other investments are categorized by asset classes. This means there are as many types of mutual funds as there are asset classes and they each offer their own unique risk and return characteristics.

The big three

Most mutual funds fall within three basic types:

With so many mutual funds available, you can easily choose a mix that works for you.

  • Stock (equity) funds - Stock funds invest in the companies that issue stock and aim to grow your investment over time, and possibly provide income. They can range in risk from moderate to very aggressive. Stock funds can be further categorized by investment style, such as growth or value, sector, geographic area, such as domestic, international and global, and company size among others.
  • Bond (fixed income) funds — Bond funds primarily aim to provide income payments by investing in government and corporate bonds. Bond mutual funds also have varying levels of credit risk depending on the types of bonds they invest in.
  • Cash equivalent (money market or stable value investments) funds — Money market and stable value funds aim to provide some stability by investing in U.S. government securities and other cash equivalents. Because they are considered lower risk, they tend to offer very low return potential.

Actively managed vs. passively managed

In an actively managed fund the fund manager researches securities then buys and sells positions in an attempt to beat a particular market index. Passively managed funds, called index funds, typically invest in the same securities that make up a particular market index in an attempt to match the performance of the index. Because there is less work involved with managing passive funds, they tend to have lower fees than actively managed funds.

Asset allocation funds

An asset allocation fund is a diversified investment portfolio made up of multiple underlying stock, bond and money market funds. The asset allocation fund manager creates an investment mix appropriate for an investment style, such as moderate or conservative.

Asset allocation funds might be attractive if you would rather leave all the investment decisions to a professional. They are designed to be a “single choice” retirement investment option. However, this high level of investment management may translate into higher fees.

Exchange-Traded Funds (ETFs)

Another similar, yet different, type of pooled investment is an Exchange-Traded Fund, commonly known as an ETF. ETFs mirror a particular market index or segment using a passively managed style, so their fees may be lower than actively managed mutual funds. Mutual funds are valued and traded only at the end of the day. Unlike mutual funds, ETFs are bought and sold throughout the day, like individual stocks and bonds. Lower management fees need to be balanced against any trading fee you may have to pay when buying and selling ETFs.

Unlike a mutual fund, ETFs are not actively managed investments. This means that the initial pool of investments bought to define the fund do not change over time. This initial pool of investments, called the initial purchase, stays static. Your investment performance is dependent on the performance of the initial pool. For additional information on how an ETF works, speak with your financial professional.

Choose the funds that are right for you

Whether you want to pick your own mutual funds, simplify the process by matching a single target date fund to your expected retirement year, or leverage the guidance of a financial professional, ING can help.

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