Having the right mutual fund can mean the difference between outperforming an index or steady gains. While short-term, money market funds may provide stability, some stock funds can outperform the market or allow for steady, passive income. Understanding the options available to you as a mutual fund investor can allow you to create a fund that best matches your risk tolerance and financial needs.
The stock market consists of a vast array of company stocks that are tied to a variety of market indexes. Stock indexes monitor the daily performance of a pool of company stocks. These global indexes can include the S&P; 500, Dow Jones Industrial Average, London's FTSE 100, Germany's DAX and Japan's TOPIX Core 30 Index. Each can be monitored and traded through their country's stock exchange: the New York Stock Exchange, London Stock Exchange, Frankfurt Stock Exchange or Tokyo Stock Exchange, respectively. The market as a whole, and indexes within the market, can be influenced by the performance of a major corporation or bank, industry performance, economic decline or regional political unrest.
Stock market index performance is dependent upon multiple internal and external factors. Internal factors occur at the company level, and they can include changes in sales per share, price-to-earnings fluctuations, adjustments to the company's profit margin and return on assets, corporate or company-wide modifications and shifts in consumer perception of the company. External performance indicators occur in the economy and are not within the control of companies. Such external factors can include changes in gross domestic product due to shifts in overall consumer demand for goods, news of political unrest or instability, industry performance, global perception of passed or denied legislation, the release of central bank and government reports and the velocity of investor trading.
Mutual funds come in several forms. Index funds are passive funds that do not require active trading through a wealth manager, as each fund is tied directly to the index in which it is based. Because index funds are linked to the major market indexes, as the market fluctuates, they too will fluctuate. Portfolio funds, unlike index funds, can contain stocks from any index. Investors have the opportunity to diversify their portfolio in multiple industries from any major global stock exchange. Mutual fund portfolios are not limited to stocks and can also include bond funds and money market funds.
Mutual funds can be diversified in stocks, bonds and other investments. Stocks can be diversified by sector, index, region, dividends and by the potential for capital gains. Index funds always follow the market index and will never under-perform or over-perform their own index. Portfolio funds can outperform and under-perform individual indexes and industry predictions because the fund will hold stocks from multiple indexes. Although stock funds fluctuate in the short run, they have historically outperformed bond and money market funds in the long term, according to the Securities and Exchange Commission.