Many people mistakenly assume that in order to invest
successfully, you need have a wide variety of investments. While
a diversified portfolio is indeed an important element of
balancing return potential with risk management and safety, being
diversified doesn't necessarily mean owning a huge number of
different investments. To make it easier for investors to hold
well-rounded portfolios, mutual fund companies have established
core funds that can be used as the foundation of your investment
strategy. Let's look at core funds and whether you should include
them in your portfolio.
What are core funds?
Core funds are designed to constitute the essential elements
of your overall investment portfolio. Different fund companies
define core funds differently, but typically these funds include
several types of investments that are suitable for most
investors, making it easier to get the investment exposure they
want without buying a huge number of individual stocks, funds, or
The primary purpose of core funds is to provide a stable base
that doesn't require much, if any, adjustment over long periods
of time. Although people might invest a small portion of their
overall portfolios in noncore opportunities in an effort to boost
overall returns, keeping their core funds intact ensures they can
reliably stick to their investment strategy and simplifies the
handling of additional investments.
What is the history of core funds?
The idea of having a primary fund-based holding in your
portfolio has been around for decades, with many investors
employing the strategy of having a broad-based mutual fund as a
core holding while adding individual stocks to boost overall
returns. The rise of index mutual funds dramatically increased
the use of the core fund concept, as index funds tracking
broad-based indexes such as the
made excellent core funds for most investors seeking to match the
return of the broader stock market.
Nowadays, fund managers market a wider variety of their
offerings for potential use as core funds. Morningstar points to
large-cap blend and large-cap value funds as good core fund
holdings, as they offer solid but unextraordinary returns with
less volatility than more aggressive stock mutual funds.
Similarly, on the fixed-income side, core funds often combine
Treasury, corporate, and municipal bonds to provide balanced
exposure to the bond market. As international investing has
become more popular, global core funds have emerged that aim to
balance their investments in developed and emerging-market
nations around the world.
How many core funds are there?
mutual fund can be used as a core fund if it aligns with the
goals of a particular investor. What many investors consider a
specialty fund can be a core fund for someone who wants to focus
entirely on that niche.
That said, a search of the Securities and Exchange
Commission's mutual fund screener found hundreds of different
funds that include the word "core" in their names. That shows the
popularity of the core fund concept, but it also raises concerns
about how well those many funds actually serve as core holdings
for a wide range of investors. Marketing aside, you have to
assess whether something that calls itself a core fund is truly
appropriate for your investing needs.
The core fund concept has become popular not only among mutual
funds, but also in the exchange-traded fund world. For instance,
the iShares family of ETFs has established a core of 20 funds
designed for investors to use to create a diversified portfolio.
With ETFs covering U.S. and international stocks, as well as the
U.S. bond market, iShares hopes to drive more retail investors
toward its core fund offerings while retaining its popularity
among institutional investors.
Why invest in core funds?
Source: 401k 2013 via Flickr.
The biggest benefit of using core funds in your portfolio is
to maintain investing discipline and ensure that you have a solid
foundation to implement your specific financial strategy. Without
a core fund philosophy, many investors find themselves owning
large numbers of mutual funds that they initially chose based on
short-term popularity and performance but that no longer serve a
useful role in their overall portfolio. Moreover, even though
mutual funds have varying names and often appear to be aimed at
achieving different results, their holdings can be similar or
even nearly identical, which makes owning multiple funds
completely ineffective at generating the diversification that
most investors would expect.
One of the best uses of a core fund is within a 401(k) or
other employer-sponsored retirement plan. Because 401(k)s have a
limited menu of available investment options, an all-purpose core
fund is often the best choice to diversify your retirement
Core funds can help simplify your overall investing immensely.
Even if you use a portion of your assets to invest in noncore
holdings in hopes of better returns, keeping most of your money
in a select group of core funds can help you stay on course no
matter what the markets throw your way.
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Core Funds: Investing Essentials
originally appeared on Fool.com.
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