Instead, they focus on stocks, bonds, gold, real estate, and money market funds. This portfolio approach decreases the reliance on any one segment of the marketplace. Gold and silver often move in the opposite direction from the stock market, and thus these funds can provide a hedge against investments in common stocks. Mutual funds were actually invented so that investors with limited means could pool their money and thereby purchase a broadly diversified portfolio. By specializing in the stocks of a single industry like technology, health care or financial services, these funds take the time-tested notion of diversification and toss it out the window.
Bond funds invest in corporate and government bonds.
A common misunderstanding among investors is that the return on a bond fund is similar to the returns of the bonds purchased. One might expect that a fund that owns primarily 8 percent-yielding bonds would return 8 percent to investors. In fact, the yield from the fund is based primarily on the trading of bonds, which are extraordinarily sensitive to interest rates. But when you buy funds, the goal isn't simply to own funds that might perform well. Rather, the idea is to build a portfolio that includes a collection of funds that together generate great returns while providing you with a smooth ride through turbulent markets.