The Different Types of Mutual Funds

You can invest in different types of mutual funds to make your portfolio more diversified. The classifications are based on the investment markets, strategies and objectives of the funds. Here are the three main classifications of mutual funds that you can invest in.

Stock Mutual Funds

Stock mutual funds are more popularly referred to as equity funds. Mutual funds that have long term investments in stocks are known to perform better than the other types because, barring economic downturns, they can maximize investment returns while facing few risks. This is based on the fact that the fluctuations in stock prices and shareholder values can be objectively assessed using financial data like company earnings.

There are many types of mutual funds that invest in stocks. For example, there are growth funds that offer huge capital appreciation but highly irregular dividend payouts. If you want a mutual fund that invests in stocks that frequently pay dividends, you can opt to invest in income funds. You can also put your money on sector funds which focus on specific industries, like technology or healthcare.

Bond Mutual Funds

Unlike the two other primary types of mutual funds, bond funds offer only fixed income or dividend payments by investing in corporate or government debts. This is due to the fact that most bonds have fixed interest rates. Unlike equity funds that tend to fluctuate, bond funds are a good way for you to ensure that your investment portfolio has a steady flow of income regardless of the prevailing economic condition. In fact, most investors use bond funds to boost their portfolio’s overall profits.

Bond funds also have different varieties. They can be categorized based on their investment risks. Low risk bonds are safe investments, but they tend to have lower interest rates. A good example would be treasury bonds issued by the United States government. Meanwhile, high risk bonds offer high interest rates but they can be a big gamble because the issuers have low credit ratings and they may fail to pay back their debts. Junk, or high yield bonds, are two examples of high risk corporate bonds.

Generally speaking, bonds are a safer investment compared to stocks. However, if the market interest rate goes up, the total value of the bond investment may drastically fall. Also, if the issuer pays off the bonds ahead of schedule, your fund will cease to receive interest payments. This would mean less dividends going into your portfolio.

Money Market Mutual Funds

If you want the safest type of fund to put your money in, choose one that specializes in money market instruments. This type of mutual fund is required by law to invest only in high quality and short term debt instruments issued by companies or federal and state governments. Moreover, of all the types of mutual funds available in the market, money market funds are bound to maintain their net asset value at a constant level of $1 per share.

Normally, money market funds provide investors with returns that are twice the interest offered in ordinary bank savings or checking accounts. The usual yield in money market funds may look small to most investors, but at least this type of investment is designed to keep one’s investment principal intact.

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