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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