A Ranking of Mutual Fund Types By Risk

Accurately gauging mutual fund risk can help investors avoid undesirable investment situations. You need to match the inherent risk of a mutual fund with your own personal risk tolerance. Here is a ranking of mutual fund types broken down by risk level from lowest to highest.

Money Market Funds

The safest form of investment in the mutual fund world is the money market fund. A money market fund deals with a number of investments that make up the money market. For example, they commonly invest in T-bills, commercial paper, CDs and other short-term debt instruments. This form of investment is a very popular place for investors to park their cash in between investments. You will usually be able to double the annual return that you would receive from a savings account with this type of investment. Therefore, this is a low risk, low reward type of mutual fund.

Income Funds

According the published risk ratings, income funds are a close second to money market funds. An income fund is one that places a premium on creating a residual income for its investors. When you invest in this type of fund, you will receive a regular residual income payment every month or quarter.

In order to achieve these results, the mutual funds will typically invest in bonds and are sometimes referred to as bond funds. The bonds pay a coupon payment to the bondholders every month, and this money is passed on to investors. Income funds can also invest in other instruments, such as low risk stocks that pay regular dividends to create residual income.

Balanced Funds

A balanced fund is one of the most common types of mutual funds available. This type of fund aims to create a very diversified portfolio of investments for its shareholders. They want to provide a safe investment, that still provides a regular income and capital gains along the way. Therefore, this is a good multipurpose fund for many different types of investors. It allows you to grow your capital steadily and slowly, as well as bring in a residual income.

Equity Funds

The most popular type of mutual fund in the world today is the equity fund. An equity fund is one that invests solely in the stock market. They buy hundreds or thousands of different stocks throughout different industries in an attempt to diversify the portfolio across the market. The main objective with this type of fund is to create capital growth in the portfolio of the investors. It is a little riskier, but it can provide greater returns over the long haul.

International Funds

These types of funds invest in foreign countries and are made up of a number of different investments. The risk associated with this type of fund is specific to the region in which invest and can be difficult to determine. While some international funds may not be considered risky, others can be very volatile. Therefore, you can anticipate large and sudden movements with this type of fund.

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