6 Types of Mutual Funds 2021
Investing in mutual funds can help you diversify your portfolio. Before you start investing in mutual funds, it is imperative you understand the types of mutual funds. There are 6 broad categories of mutual funds. Let’s talk about each one.
Money Market Mutual Funds
Money Market Funds are a type of open-ended mutual fund that invest in short-term liquid securities. These securities may be anywhere from cash equivalents to high-rated short-term corporate debt. Money market mutual funds generally provide a higher return than interest-bearing bank accounts. Money Market mutual funds were intended to give the investor high liquidity with a very low level of risk, which makes these funds one of the safest investments .
Bond Mutual Funds
Bond funds buy investments that pay a fixed rate of return. These investments are generally in corporate and government debt. Bond funds typically pay periodic dividend payments that include interest payments on the funds underlying securities. These funds also offer periodic realized capital appreciation.These funds carry a higher risk than Money market funds, because they look to earn a higher return. Although these funds are riskier than money market funds, they are safer than stocks. Since there are many different types of bonds, these funds can vary in their risk and return. With less risk, these funds have less potential for growth than stocks. These are the second most popular mutual fund type. Investors that are nearing retirement should have more of their money in bond funds. This will allow the investor to protect their nest egg but also have their money earn higher return than just sitting in the bank.
Equity Mutual Funds
Equity funds are mutual funds that invest primarily in stocks, sometimes a small amount of cash. These can be mutual funds or exchange traded funds (ETF), These funds can be actively managed or passively managed (index funds), can be categorized by the companies size, geography, and investment style. Most mutual funds are some type of equity fund. These funds have a higher rate of growth than money market and bond funds, but can experience more volatility and risk, The younger you are the higher the more equity funds or stocks you should have in your portfolio.
Funds Categorized by Company size
Some funds focus on companies that have a specific cap-size, or in other terms, how much the companies they invest in are worth. Here is a breakdown:
- Small cap: Companies valued below $2 billion
- Mid-cap: Companies valued between $2-10 billion
- Large-cap: Companies valued over $10 billion
Growth and Value:
These funds seek stocks that they believe will have above average returns These funds also have above-average risk. The primary goal of growth funds is capital appreciation, with little or no dividend payout. These funds prescribe to the motto, high-risk, high reward. Growth funds are best for investors with a long-term investment horizon and a healthy risk tolerance.
Value funds seek stocks that are undervalued by the market. Value funds primarily invest in value stocks. Stocks and stock funds that provide dividends are usually considered value funds. Sometimes they are referred to as ‘income funds. The most common purpose for using value funds is for income or yield.
Location can also determine how a fund invests. International funds invest in companies that are outside of the United States. Global funds invest in both companies that do business in the U.S. and outside of the United States. Emerging market funds invest in countries that have emerging economies.
Industry or Sector funds:
These mutual funds invest in a specific sector or industry of the economy. If you want to focus on technology stocks, you can invest in a fund that focuses on the technology sector.
A balance fund is a type of mutual fund that contains a mix of stocks, bonds, and sometimes money market instruments. Most of the time these funds contain a consistent mix of stocks and bonds. For example, a fund may have a mix of 65% stock and 35% bonds. The objective of these funds are generally in between growth and value funds, which is where the name ‘balance’ funds comes from.
Index funds are not traditional mutual funds. These funds mirror a specific index, such as the Dow Jones. These funds have a passive investing strategy, which earns more than actively managed funds over time. Index funds can vary by company size, sector, These funds go up or down as the index goes up or down. Typically have a lower cost than actively managed funds.
These funds include hedge funds, socially responsible funds, and real estate investment trusts (REITs). For example, a socially responsible fund, may not invest in companies that are involved in fossil fuels or that are involved in tobacco use.
If you are ready to start investing in mutual funds. Check out this article: Best 10 Mutual Fund Brokers
If you want to get started right away, here are some of the companies we recommend: