5.2. What a Fund Invests In

Each mutual fund or ETF you buy plays a part in your overall investment plan (Section 9.3.1), so you need to cast the right funds in the roles you have to fill. For example, if you set your asset allocation target for 70% stocks and 30% bonds, you want to buy one or more funds that deliver those percentages. Your comfort level with investment risk is another important factor in choosing funds. If you're a nervous Nellie, you don't want funds that skyrocket one day only to plummet the next. The first step to finding the right fund is figuring out what the fund or ETF invests in.

Mutual funds and ETFs cover all kinds of investments and all sorts of investing styles. Whether you want investments that are supersafe or heart-stoppingly aggressive, broad-based or narrowly focused, or something in between, the investment objective is the first place you look. Simply put, it's what the fund tries to achieve: producing income, increasing the value of your investment (called capital appreciation), high total returns, or some combination of objectives. To find a fund's investment objectives, look near the front of the fund's prospectus (which you can usually download from the fund company's website).