The Best Types of Mutual Funds to Buy

If you are ready to invest your money into mutual funds but can't decide which to buy, you should ask yourself a few simple questions. The questions can help you determine which fund will fit into your portfolio, based on your investment personality. Answering and researching about the different categories of mutual funds will help you determine the best types of mutual funds to buy for your unique needs.

  • How much of a risk are you willing to take?  Some mutual funds are a safer bet than others.
  • Would you like to see regular dividends or are you willing to wait to see a return on your investments? There are several types of mutual funds that pay out regularly. Others won't pay short-term dividends, but may produce larger returns down the road.
  • Are you interested in being more or less actively involved in the diversification of your portfolio? One particular kind of mutual fund takes human intervention out of the equation almost entirely.

Debt Funds 

One of the safest kinds of investment comes in the form of debt funds. These funds carry a guaranteed return through interest. They are usually invested heavily in government papers, such as bonds and treasury bills. Many are low risk and have a low return.  High-yield, or "junk" bonds, however, have a higher risk and a higher return. A majority of bonds pay monthly dividends and are a top choice for those who are seeking a regular income stream from their investments.  

Equity Funds 

Equity funds invest in equity shares of larger corporations. They can be either sector oriented (invested solely in one industry) or have a more diversified portfolio consisting of stocks from many different industries. Growth funds and aggressive growth funds are two such diversified options. Both funds are higher risk and strive to provide a longer appreciation term, rather than short-term dividends.  

Sector Funds

Sector funds are also considered to be riskier than other types of mutual funds. Despite this classification, choosing to invest in a sector fund can help to minimize your exposure to unwanted risk because they provide a hedge against an opposing position's price fluctuations. Most sector funds pay quarterly dividends and both long and short term capital gains. Some of the most popular sector funds are real estate funds, financial services funds, health care funds and technology funds.

Index Funds

An index fund is another breed of equity fund. It aims to mirror the index of a specific financial market, rather than seeking to outperform its stocks. Index funds tend to have higher returns and are generally more stable than other mutual funds. Many rely on a computer model and do so with little to no human interference. They are therefore considered to be the most passive form of fund management. If you are the type of investor that would like to be minimally involved in the diversification of their portfolios, they are the best mutual funds to buy.

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