It’s crucial not to put all your eggs into one basket when it comes to investing. You can suffer significant losses when one investment fails. Diversifying across different asset classes like stocks (representing the individual shares of companies), bonds or cash is a better choice. This will reduce the risk of your investment returns and allow you to enjoy higher long-term growth.
There are a number of types of funds, including mutual funds, exchange-traded funds and unit trusts (also called open-ended investment companies or OEICs). They pool funds from multiple investors to buy stocks, bonds and other assets. Profits and losses are shared by all.
Each kind of fund has its own distinctive characteristics and risks. For instance, a cash market fund invests in short-term investment that are issued by federal, state and local governments or U.S. corporations, and generally has low risk. Bond funds typically have lower yields, but they have historically been more stable than stocks and can provide steady income. Growth funds search for stocks that don’t pay regular dividends but have the potential to grow in value and generate above-average financial returns. Index funds adhere to a specific stock market index like the Standard and Poor’s 500. Sector funds are geared towards one particular industry.
If you decide to invest via an online broker, robo-advisor or another option, it’s important to be familiar with the types of investments available and the terms they come with. Cost is a key aspect, as charges and fees can take away from your investment returns. The best brokers online and robo-advisors provide transparency about their fees and minimums, with helpful educational tools to help you make educated decisions.