We begin with a discussion of money market funds for several reasons:

1. They are the safest for the novice investor;
2. They are the easiest, least complicated to follow and understand;
3. Almost without exception, every mutual fund investment company offers money market funds;
4. Money market funds represent an indispensable investment tool for the beginning investor.
5. They are the most basic and conservative of all the mutual funds available;

Money market funds should be considered by investors seeking stability of principal, total liquidity, and earnings that are as high, or higher, than those available through bank certificates of deposit. And unlike bank cash deposits, money market funds have no early withdrawal penalties.

Specifically, a money market fund is a mutual fund that invests its assets only in the most liquid of money instruments. The portfolio seeks stability by investing in very short-term, interest-bearing instruments issued by the state and local governments, banks, and large corporations. The money invested is a loan to these agencies, and the length of the loan might range from overnight to one week or, in some cases, as long as 90 days. These debt certificates are called "money market instruments"; because they can be converted into cash so readily, they are considered the equivalent of cash.

To understand why money market mutual funds is recommended as an ideal investment, let me reemphasize just seven of the advantages they offer:

The objective of income mutual funds is to seek a high level of current income commensurate with each portfolio's risk potential. In other words, the greater the risk, the greater the potential for generous income yields; but the greater the risk of principal loss as well.

The risk / reward potential is low to high, depending upon the type of securities that make up the fund's portfolio. The risk is very low when the fund is invested in government obligations, blue chip corporations, and short-term agency securities. The risk is high when a fund seeks higher yields by investing in long-term corporate bonds, offered by new, undercapitalized, risky companies.

Who should invest in income funds?

The primary objectives of growth and income funds are to seek long-term growth of principal and reasonable current income. By investing in a portfolio of stocks believed to offer growth potential plus market or above - market dividend income, the fund expects to investors seeking growth of capital and moderate income over the long term (at least five years) would consider growth and income funds. Such funds require that the investor be willing to accepts some share-price volatility, but less than found in pure growth funds.

The basic objectives of balanced funds are to generate income as well as long-term growth of principal. These funds generally have portfolios consisting of bonds, preferred stocks, and common stocks. They have fairly limited price rise potential, but do have a high degree of safety, and moderate to high income potential.

Growth funds are offered by every investment company. The primary objective of such funds is to seek long-term appreciation (growth of capital). The secondary objective is to make one's capital investment grow faster than the rate of inflation. Dividend income is considered an incidental objective of growth funds.

Growth funds are best suited for investors interested primarily in seeing their principal grow and are therefore to be considered as long-term investments - held for at least three to five years. Jumping in and out of growth funds tends to defeat their purpose. However, if the fund has not shown substantial growth over a three - to five-year period, sell it (redeem your shares) and seek a growth fund with another investment company.

The intent of an index fund is basically to track the performance of the stock market. If the overall market advances, a good index fund follows the rise. When the market declines, so will the index fund. Index funds' portfolios consist of securities listed on the popular stock market indices.

It is also the intent of an index fund to materially reduce expenses by eliminating the fund portfolio manager. Instead, the fund merely purchases a group of stocks that make up the particular index it deems the best to follow. The stocks in an index fund portfolio rarely change and are weighted the same way as its particular market index. Thus, there is no need for a portfolio manager. The securities in an index mutual fund are identical to those listed by the index it tracks, thus, there is little or no need for any great turnover of the portfolio of securities. The funds are "passively managed" in a fairly static portfolio. An index fund is always fully invested in the securities of the index it tracks.

As was noted earlier, most mutual funds have fairly broad-based, diversified portfolios. In the case of sector funds, however, the portfolios consist of investment from only one sector of the economy. Sector funds concentrate in one specific market segment; for example, energy, transportation, precious metals, health sciences, utilities, leisure industries, etc. In other words, they are very narrowly based.

Specialized funds resemble sector funds in most respects. The major difference is the type of securities that make up the fund's portfolio. For example, the portfolio may consist of common stocks only, foreign securities only, bonds only, new stock issues only, over - the - counter securities only, and so on.