The most popular mutual funds invest in stocks of companies. Stocks are also sometimes called equities . Companies issue stock to raise money to grow their business. Many mutual funds invest in fixed-income investments such as bonds issued by governments and corporations. A bond is a fixed interest security under which the issuer contracts to borrow money, agrees to repay the bondholder on a stated date in the future, and agrees to make interest payments either semi-annually or annually.
Bonds mature when the principal is due to be repaid to the bondholder.
Bonds that mature in less than five years are described as short term , between six and 15 years as medium term , and longer than 15 years as long term . The risk of owning a bond is that the issuer will default by missing interest payments or by being unable to repay the principal at maturity. The higher the perceived credit-worthiness of a bond issuer, the less interest the issuer must offer investors in order to borrow money. The safest fixed-income securities are generally accepted to be those of the U.S. government. There are several reasons a small investor should choose to buy mutual funds rather than individual stocks and bonds.