Stock mutual funds (sometimes also called equity mutual funds) invest primarily in stocks (also called equities). Although you can find many specific types of stock funds with widely varying risk and reward characteristics, stock funds in general outperform bond funds. Stock funds are top performers because they’re invested in the stock market, which has proven, over many decades, to be the world’s fastest-growing investment arena.
Over the past 20 years, the return of stock funds has been quite good — about 14.8% in average annual gain, including all kinds of profits (growth in net asset value, dividends, and capital gains).
However, a tradeoff is involved. The higher growth of stock funds comes with somewhat greater risk. Stock funds may rise or fall, depending on the behavior of the overall stock market, of particular industries, or of the specific companies selected by the fund manager. In a prolonged bear (declining) market, stock funds may even stagnate for a period of months or years.
The longer your investment horizon (that is, the more you are focused on long-term rather than short-term investment goals), the more appropriate stock funds are for your portfolio. If you expect to cash in your investment within the next three years, you should consider keeping all or most of your money in bond funds or other relatively safer investments. Not all stock funds behave alike. Wide variations are possible among stock funds in terms of risk, volatility, and growth potential. The following sections highlight some common types of stock funds, with explanations of how each kind of fund can be expected to perform.
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