Mutual funds, like the individual stocks or bonds that make up a fund's
portfolio, or list of holdings, have the potential to provide varying levels of investment return and carry different levels of
risk.
When you invest in stock mutual funds, you expect a
return
similar to what you'd have if you owned a comparable portfolio of individual stocks, and you face the risks that are typical of stock investing. For example, because
small-cap
stocks tend to be
volatile, you might expect a small-cap stock fund to outperform other categories of mutual funds when stock markets are strong, but lose a significant portion of its value in a market downturn, just as a portfolio of small-company stocks might.
But other types of stock funds, such as broadly diversified large-company equity income or
growth and income funds,
which invest in dividend-paying stock, are less likely to suffer a dramatic short-term decline than more narrowly defined funds that invest in a particular
sector
of the economy, such as biotechnology or pharmaceuticals, or in small company stocks.
Similarly, when you invest in
bond funds, you anticipate interest earnings in line with the type of fund you choose:
corporate
or
government,
long-term or short-term, high quality or
high yield
— which means bonds that pay a higher interest rate to compensate for greater risk. With both stock and bond funds,
net asset value (NAV)
per share is based on the market value of the securities the fund holds.
You may also choose
money market mutual funds
for the
cash-equivalent
portion of your portfolio. Unlike bank products, such as
CDs, these funds are not insured — any more than the assets in stock or bond funds are. But money market fund managers do try to maintain the value of each share at $1.
Marc Lackritz
Marc Lackritz describes the main factors that drive the performance of equity mutual funds.
The most critical determinant of the performance of an equity
mutual fund
is the performance of the stock market as a whole. On average, what's happening in the marketplace explains about 85% of the total return of most growth, value, and equity income funds. The investment decisions the fund manager makes and the timing of those decisions explain most of the remaining 15%.
When you invest in stock mutual funds, you expect a
Marc Lackritz