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Before you can pick an investment, you need to have a thorough understanding
of what you’re investing for – because different types of investments
are suited to achieving different goals.
 For
example, if you’re investing to prepare for sending a child to college
in 15 years, you’ll need an investment vehicle that can grow, or appreciate,
in value. If you’re investing to help supplement your monthly income,
then you’ll need an investment vehicle that seeks income.
In general, stocks are seen as a growth investment (although some stocks
do provide income), while bonds are seen as income-producing investments.
Another important
factor in choosing investments is your time horizon, which is simply how
far into the future your goals are. This can help you determine how much
risk you can or should be taking on, and you can pick your investments
accordingly.
Typically, shorter-term
goals require more conservative investments, to reduce the risk of principal
loss. Conversely, the more time you have until you need your investment
dollars, the more risk you can afford to take on if you’re comfortable
doing so.
A mutual fund’s
investment objective can be found in its prospectus, where you’ll
often see it stated in terms of both objective and time horizon. Some
common investment objectives are as follows:
Long-term capital
appreciation
Total returns (capital appreciation and income) greater than a particular
index
Current income
Current income that’s free from federal and/or state income taxes
Current income with capital preservation
Current income with liquidity and capital preservation
Current income with stable share value
It’s important
to remember that these are objectives, meaning that’s what the investment
strives to accomplish. There is no guarantee that any investment will
achieve its objective.
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