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Types of Vanguard Funds and How to Choose the Right One

Vanguard is an asset management firm that offers customers access to investment accounts and securities, including stocks and mutual funds. Its mutual funds and exchange-traded funds, in particular, have been popular investment options and key parts of pension plans, IRAs, 401(k)s, and managed portfolios. Vanguard funds have been known to help one get relatively better returns on their investment compared to traditional, actively managed mutual funds. But choosing the right Vanguard product is important.

Types of Vanguard Funds and How to Choose the Right One

Types of Vanguard funds
Actively managed mutual funds: These funds are managed by investment professionals who analyze the market and choose stocks that are capable of beating the average market returns. The management fees of such funds are usually higher, yet the funds are known to underperform their market benchmarks.

Passively managed mutual funds: These funds aim to match the returns of a broad market index such as the S&P 500. Usually, passively managed funds have been observed to perform better than actively managed funds. Besides, these funds have lower fees as they are managed without a lot of oversight.

U.S. Stock ETFs: Vanguard is popular for offering a variety of ETF (exchange-traded funds) products that are focused on U.S. stocks. These ETFs are divided based on the size of the companies they target: large-cap, mid-cap, and small-cap. Then, these funds are divided based on the performance of the companies in which they invest. For example, growth ETFs invest in the stocks of companies with above-average growth rates, whereas value ETFs invest in companies with below-average valuations.

International Stock ETFs: Vanguard offers three types of international ETFs—global, international, and emerging markets. Global stock ETFs invest in stocks from all over the world, including the country. International stock ETFs invest in stocks from all around the world except the ones in the country. Finally, emerging-market ETFs only invest in stocks from developing countries.

Tips for choosing Vanguard funds
1. Determine investment goals
Before shortlisting any of the top-rated Vanguard funds to invest in, it is crucial to determine the objective of the investment. This means knowing whether one wants to invest for the long term or the short term. For instance, saving for retirement is a long-term objective. In such a situation, one can consider investing in bonds and stocks. While stocks may sometimes lose their value dramatically, their growth is quite substantial over the long run. This kind of growth is vital for reaching bigger financial goals, such as saving for retirement. Meanwhile, short-term goals such as buying an asset or saving for a vacation can be met by considering investments that do lose value over time. These include money market funds, a savings account, or a certificate of deposit. While these do not offer big returns, they do not carry a huge risk of losses.

2. Choose the right investment mix
While investing in Vanguard funds, the decision is not limited to the type of funds to buy. In fact, the decision that is going to have a bigger impact on the investing outcome is the proportion of stocks and bonds one needs to own to meet their financial goals. In fact, over 90% of a diversified portfolio’s returns are dependent on the percentage of bonds and stocks one owns. Just about 10% of the returns are based on the specific investments that one chooses. So, it is evident that the investment mix one chooses plays a significant role in the returns. While choosing the mix, it is important to remember that stocks give, on average, a 10% annual return over the long term, while bonds return about half on an annual basis. Moreover, bonds have fewer lows than stocks over the long run.

3. Diversify investments
The key to maximizing returns and lowering the risk is diversifying investments. This can be done by buying multiple stocks and bonds. So, even if one investment crashes, it won’t make much of a difference to total returns. For instance, those saving for retirement often invest in mutual funds that bring together hundreds or thousands of different investments.

4. Keep the costs low
Even if one invests in one of the 10 best Vanguard index funds to buy now, it would be difficult to get good returns if one does not keep the cost low. This means one needs to be price-conscious when choosing a Vanguard fund. According to research, lower-cost investments are known to perform better than high-cost ones over the long term.

5. Consider expense ratios
To determine what an investment actually costs, one should look at the expense ratio, which is the percentage of the fund’s average net assets that are used to manage the fund. This value can be found in the fund’s prospectus. For instance, a fund that has an expense ratio of 1.00% will cost about 1% of the total balance per year. So, if one has invested around $10,000 in such a fund, about $100 will be deducted from the fund as expenses each year. Alternatively, if a fund has an expense ratio of 0.05% or less, only $5 a year would be deducted.

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