Different Types Of Mutual Funds

Different Types Of Mutual Funds

Mutual funds are established with a particular goal in mind, so one of the best ways to evaluate the merit of your investment is to see if the purpose is valid. There are three types of mutual funds you can choose from:

  • Equity funds (such as a stock).
  • Fixed-income funds (a bond, for example).
  • Money market funds.

In North America alone, you can choose from up to 10,000 mutual funds, which means there are more choices for mutual funds than stocks.

The most important thing to remember is that there is variety for a reason. The risks and rewards are always changing, and no matter how little risk you think your fund contains, there is always a chance that you will receive a negative return.

Bond/Income Funds

Bond/income funds are meant to provide you with a steady return of income on a regular basis. These funds look for debt from the government or corporations to invest in, and are not necessarily meant to provide large returns, but rather they are low-risk and usually guarantee a small return. This is more common among retirees and the more conservative mutual fund users who want to gain money slowly instead of taking the high risk/high reward option. Beware, however; certain junk bonds, for example, can drive up the amount of risk. If you really want a safer path, look for funds providing government securities.

Money Market Funds

Money market funds are another type of conservative investment often done by retirees and others who are not seeking lucrative returns. It is best defined as a fund that seeks to replicate a bank deposit but that is slightly more promising and can garner a slightly larger amount of interest. This fund invests primarily in U.S. treasury bills and securities, which posit minor stipulations that provide minor returns.

Balanced Funds

Balanced funds are put in place to provide people with a balance of income and safe, all which provide you with capital appreciation. This is done so that you can invest in both balanced income and equities, as opposed to being too risky or too conservative.

Another similar type of fund is known as an asset allocation fund. These allow the portfolio manager to have freedom to change the specified percentage of the fixed income or equities in the investment as the business cycle progresses.

Equity Funds

Equity funds vary greatly because of the sheer amount of equities. These vary so much that it is much easier to use a visualization, and many investors do so; using what they call a ‘style box’, investors can cross-reference the size of the companies with the investment strategies of their portfolio manager. These boxes will place an investment into a category based on the return potential of the company, either calling it a value, blend or growth stock. While value stocks are low price and high dividend, companies in the growth categories are riskier but will often provide a higher return. The companies are divided by size, either small, medium or large.

Specialty Funds

Specialty funds are popular funds that are harder to classify. These are often less broad and focus on a specific aspect of the economy. Sector funds are one example of such specializing. Focusing on a certain part of the economy, they are extremely volatile, but they also provide big gains. Regional funds, on the other hand, are like international funds, but instead of focusing on many countries, they will focus specifically on one area of the world. If you are seeking something more altruistic and beneficial, perhaps socially responsible funds are for you. They will not invest in certain industries, such as tobacco or nuclear power.

Gl;asses resting on a picture of mutual funds.

Global Funds

Global funds are put in place so that you only invest outside of your own country. These funds are often classified differently from other funds because it is difficult to determine whether these funds will be riskier or safer than more local groups. However, political risks can threaten the growth of a company, and therefore stability must be put into consideration. On the flip side, there are nearly 200 countries in the world, and the odds that another nation is doing better than yours is high.

Index Funds

Index funds are established to represent the fluctuations of a broad market index such as the Dow Jones or the S&P 500. Based on the idea that portfolio managers cannot beat the market, an index fund will merely imitate the movement of the market and provide return to investors for a low fee.

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