Different Types of Mutual Funds

By Bill Stone

This is a guide to the different types of mutual funds. When it comes to investing in mutual funds, investors have literally thousands of choices. Before you invest in any given fund, decide whether the investment strategy and risks of the fund are a good fit for you. The first step to successful investing is figuring out your financial goals and risk tolerance – either on your own or with the help of a financial professional. Once you know what you’re saving for, when you’ll need the money, and how much risk you can tolerate, you can more easily narrow your choices.

Most mutual funds fall into one of three main categories – money market funds, bond funds (also called “fixed income” funds), and stock funds (also called “equity” funds). Each type has different features and different risks and rewards. Generally, the higher the potential return, the higher the risk of loss.

Money Market Funds:

Money market funds have relatively low risks, compared to other mutual funds. Investor losses have been rare, but they are possible. Money market funds pay dividends that generally reflect short-term interest rates, and historically the returns for money market funds have been lower than for either bond or stock funds.

Bond Funds:

Bond funds generally have higher risks than money market funds, largely because they typically pursue strategies aimed at producing higher yields. Because there are many different types of bonds, bond funds can vary dramatically in their risks and rewards.

Stock Funds:

Although a stock fund’s value can rise and fall quickly (and dramatically) over the short term, historically stocks have performed better over the long term than other types of investments – including corporate bonds and government bonds.

You can purchase shares in some mutual funds by contacting the fund directly. Other mutual fund shares are sold mainly through brokers, banks, financial planners, or insurance agents. All mutual funds will redeem (buy back) your shares on any business day.

Making any sort of investment involved a certain amount of risk so it is always wise to seek the advice of a professional before making any decisions.

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