If you’ve looked in to investing at all in the last ten years, I’m willing to bet you have considered a mutual fund at one point or another, maybe you even bought one in your online brokerage account (see our TradeKing Review for a good brokerage if you are looking for one) and when you first started trading but didn’t really know a lot about it. Mutual funds are a very popular investment option, especially in these tough financial times when diversifying your portfolio is not just a luxury but a must.
While there are a lot of excellent benefits to investing in mutual funds, the trickiest part can be trying to figure out what funds are available so I thought I would take this opportunity to talk about some of the basic types of mutual funds that there are out there.
Essentially there are three types of mutual funds, and literally thousands of individual funds within each. These three types of funds are equity or stock funds, bond funds and money market funds. Each have their own pros and cons so let’s take a look at each in a little more depth.
Equity Mutual Funds
Equity mutual funds are the most common type of funds that invest primarily in stock investments. There are literally as many types of stock funds as there are stocks (probably more if you count all the combinations you could put together). Because stocks are riskier than bonds and money markets, equity funds are naturally more risky than bond funds and money market funds.
Within the equity funds category there are many different sub-categories of funds. Growth stock mutual funds focus on the stocks of large companies with an eye toward long term capital gains while income funds focus more on short term income and consist of stocks that pay regular dividends. You can also find more specific funds that focus on an entire sector, one type of company or even more specialized types of funds that invest exclusively in socially responsible and/or environmentally friendly companies. As you can tell the options with equity funds are pretty much endless.
Bond Funds
Bond funds focus in, well… bonds! I’m sure you figured that out by the title but if not I’m here to help. There are a lot of different types of bonds from government issued treasury or agency bonds, local government municipal bonds and corporate bonds issued by individual companies. Within each type of bond there are different risk levels, obviously the government bonds are safest and bonds issued by risky corporations (also known as junk bonds) amongst the riskiest.
Money Market Funds
Money market mutual funds are the safest of the three primary types of funds. They consist of low risk investments like treasury bills, CD’s, commercial paper and other forms if extremely low risk investments. As you can imagine the lower the risk the lower the return on investment so you won’t make a lot of money on this type of investment but you would have a tough time losing your investment as well. This isn’t to say you can’t lose your investment though as ALL investments have risk.