Not all mutual funds are the same. Mutual funds are divided into categories based on the types of securities targeted for their portfolios and the rate of return they are looking for. There’s a fund for just about any kind of investor or investment strategy. Money market funds, sector funds, alternative funds, smart-beta funds, target-date funds, and even mutual funds that invest in other mutual funds are among the most common mutual funds. But despite the broad spectrum of mutual funds, some stand out from others.
The most common sort is equity or stock funds, which invest primarily in shares. There are several categories of equity funds. Some equity funds are named after the size of the companies they invest in, while others are named by their investment approach. Equity funds are also categorized on whether they own stocks from within (U.S.) or outside the country. Since there are different types of equities, there are different types of equity funds.
The fixed-income fund is another significant type of mutual fund. A fixed-income mutual fund invests in securities that pay a set rate of return. These include government bonds, corporate bonds, or other debt instruments. The idea behind a fixed-income portfolio is to generate interest income and pass it on to shareholders. These funds follow the aggressive management strategy and hunt relatively undervalued bonds. By buying undervalued bonds, fixed-income funds aim to sell them at a higher price and earn a profit. Compared to certificates of deposit and money market investments, fixed-income funds are likely to pay higher returns, hence the appeal. However, this doesn’t mean that bond funds carry no risk whatsoever. Much like stocks, there are different types of bonds, and the risks associated with bond funds directly result from where the fund chooses to invest. Let’s say you decide to invest in a bond fund that specializes in high-yield junk bonds. These are typically much riskier than a bond fund that only invests in risk-free government bonds.
Another type of mutual fund is “index funds,” which have grown in popularity recently. The investing technique assumes that it is difficult, if not impossible, to outperform the market consistently. The fund manager purchases equities representing a primary market index, the S&P 500 or the Dow Jones Industrial Average (DJIA). This technique requires less study from analysts and advisors, resulting in lower shareholder fees.
Balanced funds contain different asset classes, such as equities, bonds, money market instruments, or alternative investments. The goal is to minimize the risk of exposure across asset classes. Also referred to as an asset allocation fund, bond funds are categorized based on the investor’s goals. Some funds are bound by a specific allocation plan, allowing investors to control their risk profile. Others use a dynamic allocation policy to meet different investor goals. This might involve reacting to market fluctuations, business cycle changes, or the changing phases of the investor’s life.
Money Market Funds
The money market comprises safe (low-risk), short-term debt items, such as government Treasury bills. This is a secure location to put your funds. You won’t get rich, but you won’t lose your principal either. The typical return is slightly higher than the interest you’d earn on a regular checking or savings account. The only exception is a financial crisis or a nationwide recession. Some money market funds incurred massive losses during the 2008 financial crisis, as prices fell below $1 and broke the buck. Due to this, interest in money market funds has decreased considerably, but it’s still the safest place to put your money.
Income funds are designed to give investors a steady stream of income. These funds invest in government and high-quality corporate debt and keep these bonds until maturity. They earn interests regularly, which is passed on to investors. While fund assets may appreciate, the main goal of these funds is to provide investors with consistent cash flow. As a result, conservative investors choose to invest in Income Funds.
An international fund (or foreign fund) invests solely in assets located outside the home nation. On the other hand, global funds may invest in a wide range of places worldwide, including inside the home nation. However, these mutual funds are more difficult to categorize as riskier or less risky than domestic investments. If utilized correctly, they can help reduce risk by increasing diversification because foreign country returns may be uncorrelated with home country returns. Although the world’s economies are becoming increasingly interconnected, it is still probable that another economy somewhere is outperforming your own country’s economy.
Specialty funds include mutual funds that have shown to be successful but do not necessarily adhere to the stringent categories we’ve discussed thus far. This sort of mutual fund forgoes broad diversification favoring concentrating on a particular aspect of the economy or a targeted approach.
Regional funds allow you to concentrate on a specific part of the world. This might imply focusing on a larger region (Latin America) or a single nation (only Brazil). These funds benefit from their investment in foreign countries, which may be difficult and expensive otherwise. However, you must accept the significant danger or high risks if the region goes into recession.
The whole idea behind ethical or socially responsible funds is to invest in companies that adhere to specific standards or beliefs. For example, some socially accountable funds will not invest in “sin” industries such as tobacco, alcoholic beverages, weapons, or nuclear power. The aim is to get good financial returns while maintaining a healthy conscience.
When it comes to mutual funds, there is something for everybody. The only deciding factor is what kind of returns you want and risks you are willing to take.