There are different kinds of
mutual funds.
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Types of Fund
There are different kinds of mutual funds.
A mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional money managers, who allocate the fund’s assets and attempt to produce capital gains or income for the fund’s investors.
Mutual funds give individual investors access to professionally managed portfolios of equities, bonds, and other securities. Each shareholder, therefore, participates proportionally in the gains or losses of the fund. Mutual funds are divided into several kinds of categories, representing the kinds of securities they have targeted for their portfolios and the type of returns they seek. There is a fund for nearly every type of investor or investment approach.
Equity funds are made up of stocks, which are publicly traded shares of a company. If you own stock in a company, you own a tiny piece of that company. When you invest in an equity mutual fund, you own a tiny piece of all the companies that mutual fund invests in. Of all the types of mutual funds, equity funds are the most volatile, but they also carry the greatest potential for growth and a higher rate of return over the long haul.
Fixed-income funds are another type of mutual fund where investors put their money into either government or corporate bonds. Instead of purchasing stock (or equity) in the company, you are lending your money with the expectation that you’ll be repaid. While the returns from growth stock mutual funds bounce all over the place, fixed-income funds have a steady rate of return.
Money market funds invest in short-term debt from consumers. Most of the time, these are even worse than bond funds for building wealth! In periods of very low interest rates money market funds might even lose value over time if inflation rises! A money market mutual fund watches over your money and keeps it safe, but it minimizes risk so much that it doesn’t leave much room for growth.
Balanced funds (also called hybrid funds) combine investments from stocks and bonds. These funds help you automatically diversify your investments by spreading out your money. With balanced funds, the ratio of equity (stocks) and debt (bonds) will vary depending on the funds return objectives.
Target-date funds are one of the most common types of balanced funds. They’re based on the asset allocation approach to retirement planning. Here’s how it works: You expect that you’ll retire at a certain age, say 65. You invest aggressively in growth stock mutual funds when you’re young but as you age, the fund automatically reallocates your investments to money markets and bonds in order to decrease volatility and risk to preserve your money as you near retirement.
Index funds are not traditional mutual funds, but they’re a close cousin of equity funds. Instead of buying stock and holding on to it, index funds operate by trading—buying and selling stock all day long. They’re not actively managed and their goal is to mirror what is happening in common indexes like the S&P 500 and the FTSE 100.
Socially Responsible Funds
Some mutual funds are created to especially reflect the ethical or moral views of the investor. They might invest in a wide range of companies dedicated to a certain cause—such as gender equality or environmental consciousness. They also might be deemed “ethical” by excluding products like tobacco. Each fund will yield a different return, but some are much lower than traditional mutual funds.
