Types of Mutual Funds
It can be difficult to choose a mutual fund to invest your money because there are so many funds with different objectives. It is estimated there are more than 10,000 mutual funds in the United States alone. The more you know about mutual funds in general, the easier it will be to choose one as your primary investment vehicle. The first step is to understand the different types of mutual funds.
Three basic types. According to experts there are equity funds, bond funds and cash funds. Those are the three main overall categories of mutual funds. Within those three categories there is a huge assortment of different funds with different levels of risk and different objectives. The equity funds include stocks and often have some type of pre-chosen portfolio to allow for diversification. The bond funds provide a very stable return, offering much less risk than equity funds. These may include bonds from the government, such as Treasury bonds, or bonds issued by corporations or municipalities. The third basic type of fund is cash, which offers the greatest stability, although generally the lowest rate of return.
Balanced funds. Mutual funds that include a mix of cash, bonds and different stocks are called balanced funds. These mutual funds are popular because the investor is diversified. That means the entire fund doesn’t rely on any particular investment area. In a down economy, the stocks within a balanced fund may fall, but both bond funds and cash funds will make small gains that will help to wipe out some of the losses. Balanced funds won’t maximize returns in a bull market, but they have the potential to generate income and offer some protection during down markets.
Large inventory of mutual funds. Experts say there are more equity funds that include stocks than both the bond funds and cash funds combined. It’s possible to find any level of risk you may want to take on by examining enough mutual funds on the market. Many mutual funds focus on a particular type of stock, such as international stocks or big corporations. If you believe that big companies, such as General Electric and General Motors, are the best money-makers for the forseeable future, there are plenty of so-called “large-cap” funds. It’s also possible to invest in specialty funds, which may focus on a particular sector of the economy – such as energy, technology or health. The bottom line is to take the time to understand and study whatever fund you choose.