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3 Investment Fund Terms You Should Know

3 Investment Fund Terms You Should Know

January 27, 2023

Even if you’ve been investing for years, the language of investing can sometimes feel confusing. Getting a better grip on investing terminology (which is often a complex combination of legalese, colloquialisms, and slang) can help you feel more confident when evaluating your financial strategy.

Of course, understanding complex financial terms and concepts may be one of the reasons you chose to work with our financial firm; passing familiarity isn’t the same as detailed knowledge, and often we think of “investing” only as buying stocks or shares of certain companies. But individual stocks are only a tiny piece of the overall investment arsenal, and we believe that for most clients, balance is key — so let’s review a few key account types that every investor should know.

Mutual Funds: A mutual fund is a lower-cost way to invest; it pools your investment dollars into a group of assets along with many other investors. Mutual funds are handled by a portfolio manager who uses the pooled funds to buy into stocks, bonds, and short-term debt, and any trading happens once the markets close, rather than throughout the day. They tend to be popular with investors because they typically build in diversification (investing in a range of companies and industries), and usually set low dollar amounts for buying into the fund. Mutual funds generally fall into one of four categories:

  • Target date funds (designed for individuals with specific retirement dates in mind)
  • Stock funds (which invest in corporate stocks)
  • Bond funds (many different types – corporate and government-issued are common ones you may have heard about – all aiming to produce stable returns)
  • Money Market funds (which invest in high-quality, short-term investments)

Exchange-Traded Funds: ETFs combine elements of mutual funds and conventional stocks to create unique investment opportunities. An ETF is a pooled investment fund (like a mutual fund), but ETF shares are bought and sold at varying prices throughout the day (like conventional stocks). Certain ETFs have tax advantages — you can own ETFs in taxable, tax-deferred or tax-free accounts — so we should discuss how this may impact your overall financial or retirement plan.

Index Funds: Index funds take one of the multiple approaches to track the returns of a market index, like the S&P 500. These investment vehicles share similar characteristics with mutual funds and ETFs, but they are designed to mirror the performance of a particular market index (small-cap stocks, emerging markets, etc.). Index funds follow a passive investment strategy, seeking to match the risk, return, and long-term performance of an index. Because of this, they usually have lower expense ratios.

You’re now armed with a bit more knowledge about a few of the many available investment options that can make up the backbone of your financial plan. However, knowing exactly which option is best for YOUR unique situation is a whole different matter. Give our office a call today to set up some time to review your plan. We’ll make sure everything is on track and can answer any additional questions you may have.

Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance is no guarantee of future results. Please note that individual situations can vary. Therefore, the information presented here should only be relied upon when coordinated with individual professional advice.

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