Good Choices. Identify the types of mutual funds that would be good choices to meet the following investment objectives: emergency fund, house down payment, college fund for 2-year-old child, and retirement fund for a 25-year-old. Give two reasons why each of your recommendations would be appropriate.
There are several factors that go into choosing a type of mutual fund in which to invest, one of the most important of which is the time frame in which you are most likely to need the money.
For long-term investments, such as that of a young person starting to save for retirement, general a portfolio with a high percentage of equities is a good choice. In such a situation, volatility is less a concern than long term growth, and historically equities have given the best long term rate of return.
A 529 plan is probably the best choice for the college saving fund for a child, as its tax-protected status adds a significant amount of value. As the child gets closer to college age, you would want to rebalance a 529 plan from equities towards bonds to reduce volatility.
For building emergency funds or a house down payment, on the other hand, two important factors are liquidity and lack of volatility, making bonds or even CDs or money market accounts (if interest rates rise) good choices.