Types of mutual funds
Before you decide to invest in mutual funds, you must clearly understand the major types and how each works.
Mutual fund may have a collective term, but there are many types and different benefits as well. Before you invest, understand the fund’s investment goals and make sure you are comfortable with the level of risk.
Some funds may be similar but their risk and return characteristics may not be identical. Make informed decisions about mutual fund investments with the help of in-depth research based on parameters including
- fund house
- fund manager
- ranking and
- past performance.
The following are types of mutual funds.
Money market funds
These are the type of mutual funds that invest in high-quality, short-term fixed income securities like
- Government bonds
- Treasury bills
- Bankers’ acceptances and
- Commercial paper.
They are considered to be one of the safest types of mutual funds because they make up to 15% of the mutual fund market.
However, they are marked with a lower potential return than other types of mutual funds.
Equity mutual funds buy stocks of a collection of publicly traded companies. In brief, Equity funds are the type of mutual funds that invest in stocks. It is aimed to grow faster than money market or fixed income funds which also puts the fund at risk of losing money. However, since Equity funds vary in types, you can choose from different types of equity funds including those that specialize in
- Growth stocks
- Income funds,
- Value stocks
- Large-cap stocks
- Mid-cap stocks
- Small-cap stocks, or
- Blend of these.
Equity funds are considered to be the most common type of mutual funds. Thus, most mutual funds on the market (55%) are some type of Equity fund. Equity funds have a higher potential for growth but also a risk of depreciation in value.
Balanced fund is also known as asset allocation funds, these investments are a mixture of equity and fixed-income funds with a fixed ratio of investments such as 60% stocks and 40% bonds.
They try to balance the aim of achieving higher returns against the risk of losing money. Hence the name balanced. They have less risk than pure equity funds but have more risk than fixed income funds.
Specialty fund also known as alternative fund focuses on specialized mandates such as real estate, commodities or socially responsible investing. It includes hedge funds, managed futures, commodities and real estate investment trusts.
For example, a socially responsible fund may invest in companies that support environmental stewardship, human rights and diversity, and avoid investing in controversial industries involved in alcohol, tobacco ans the military.
An index fund is a type of mutual fund whose holdings match or track a particular market index, such as the S&P 500. Index funds have exploded in popularity in recent years, thanks to the rise of passive investing strategy, which, over time, typically earns better returns than an actively managed approach. Like equity funds, index funds can vary by company size, sector and location.