Simply a collection of stocks and/or bonds, a mutual fund is like a company that invests the money belonging to a group of people in stocks, bonds, and other similar things. While these are generally very simple to buy, there’s a lot of planning done beforehand. There are seven different types of mutual funds, and each comes with its own benefits and disadvantages that need to be considered.
- Money Market Funds
Money market funds are one of the lowest earners but are also incredibly safe. They consist strictly of short-term debt instruments like Treasury bills. Since the instruments are always paid off, there’s no risk of losing your principal, but you don’t make a lot in returns. Typically, money market funds earn more than a typical savings account but less than a certificate of deposit.
- Bond/Income Funds
Designed to provide current income on a steady basis, the bond/income fund invests mainly in government and corporate debt. They are generally not risky, but there are some issues to be aware of. A fund specializing in junk bonds is very risky because all bond funds are at the mercy of rising interest rates; meaning if the rates go up, the fund value decreases.
- Balanced Funds
Balanced funds invest in a mixture of safety, income, and capital appreciation. In general, they invest in 60% equity and 40% fixed income to provide guaranteed growth while taking a few risks to maximize gains. In most cases, the percentage is fixed, but a certain type, known as an asset allocation fund, allows the portfolio manager to alter the ratio of asset classes to adapt to the current economy.
- Equity Funds
Equity funds are the largest of the seven types of mutual funds, and they aim for long-term capital growth with some income. The basic idea is to define companies based on those that are high quality, but out of favor with the market, and those that continually show steady growth. Balancing investments between the two lowers the risk factor, which makes equity funds a medium risk fund.
- Global/International Funds
Global funds can invest in every fund, including those in your home country while international funds only invest in those outside of your home country. They tend to be high risk, yet they can also provide stability for your portfolio through diversification. Supporting countries with better economies than your own has the potential to yield great results.
- Specialty Funds
Specialty funds are made up of sector funds, regional funds, and socially responsible funds. Sector funds are strictly for different parts of the economy and are arguably the riskiest. Regional funds focus on specific areas of the world, and, like sector funds, they are extremely risky. Socially responsible funds only invest in companies that adhere to certain guidelines or beliefs.
- Index Funds
This fund replicates a broad market index under the assumption that most managers can’t beat the market. Because of this, there are low fees associated with it, and it carries a moderate risk.