A mutual fund is a portfolio of stocks, bonds or other investments. When you buy shares in a fund, you become a partial owner of all the securities held inside the fund. The average interest or returns varies greatly between different types of funds. Some funds are very conservative, offering relatively low but steady returns, while other funds are more aggressive and earn higher returns over time.
The amount of time you have to reach your investment goals is a primary factor that determines how aggressive you can afford to be. Stock prices tend to rise over time but can lose money from one year to the next. If you are investing for retirement, and you have many years before you retire, you can afford to be more aggressive with your investing strategy. If you need your money over the next three to five years, you cannot afford to be as aggressive and it will be necessary to settle for lower annual returns.
Bond and Treasury Bill Funds
When you need your money over the next few years, bond funds and Treasury bill funds offer stability and steady annual returns. According to New York University, bonds have earned on average more than 5 percent per year since 1928. Treasury bills have earned nearly 4 percent each year during this same period.
Blue Chip Stock Funds
A blue chip stock fund invests in large, well-established companies such as Coca-Cola and Johnson and Johnson. The price of blue chip companies is not as stable from year to year as treasuries and bonds, but they are a relatively low-risk investment for long-term investors. On average, blue chip stocks have grown by an average of more than 11 percent per year since 1928.
Aggressive Growth Funds
To earn the highest returns, you need to be more aggressive and accept more annual volatility risk. An aggressive growth fund invests in small companies that reinvest their earnings as opposed to paying earnings to investors in the form of dividends. According to a study performed by Duke University, aggressive growth stocks have earned investors average returns of more than 16 percent per year since 1925.
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