Millions of investors use mutual funds to make their money grow. As with any investment, if you pick the right mutual fund, your money can grow substantially over the long run. However, not all mutual funds are equal in terms of their potential for growth. Below, we'll take a look at some common types of mutual funds to give you an idea of how much money you can make.
Money market mutual funds: Low returns
Money market mutual funds are designed more to provide liquidity for investors than to produce large returns. These cash-like investments pay returns that are based on prevailing short-term interest rates, which fluctuate upward and downward with market conditions.
Over the long run, money market mutual funds have generally averaged between 3% and 4% returns annually. In recent years, though, money market mutual funds have had returns very close to zero, because short-term rates have been extremely low. Most investors shouldn't see money market mutual funds as vehicles for growth.
Bond mutual funds: Middling returns
In order to boost returns, many investors invest in mutual funds that buy bonds. Bonds have longer maturities than the securities that money market mutual funds hold, so the companies that issue them pay higher interest rates. However, these funds are subject to interest rate risk, therefore it's possible to suffer a loss of principal with a bond fund.
Over the long run, bonds have averaged returns of between 5% and 6%, and the typical bond fund can match this performance. Again, though, future returns under current conditions could be lower than average because of the low-rate environment that has prevailed for several years. Upside potential on bond mutual funds is typically limited.
Stock mutual fund: Higher returns
Stock mutual funds have the highest potential for returns, but they also carry greater risk. Over time, the typical large stock fund has returned an average of about 10% annually, and some higher-risk funds specializing in riskier small-company stocks have earned even greater returns.
Stock mutual funds can rise and fall with the market, so dramatic downturns are possible from time to time. Nevertheless, those who are willing to accept the risk of those losses can reap the rewards of higher average returns over the long run.
Mutual funds can help you reach whatever financial goals you have. Don't expect to get rich overnight, but given time, the returns on mutual funds can be quite impressive.
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