What are the different types of mutual funds? Mutual funds are defined as a vehicle of financial institutions to collect funds that are used to purchase security. These are open ended types of insurance, where there are no limits for as to how many times you would want to invest and use your investment. There are three main types of mutual funds. These three are equity funds or stocks, fixed income funds or bonds, and money market funds.
Money market funds are types of mutual funds that are consisted of instruments of debt. These are called treasury bills. Most people consider these types of mutual funds as a very safe way to park your money. However, these are the types of mutual funds wherein you don’t get any returns – you just don’t risk losing principal. A return is defined as an amount that is twice the amount of your investment.
Bonds or Income funds are types of mutual funds that you pay on a regular or steady basis, like your current income. These are the funds that you invest in corporate or government debt. The problem about these types of mutual funds is that their value may depreciate. However, as mentioned above, the goal of these types of mutual funds is to provide a steady flow of income. This is why these are the types of mutual funds that are mostly chosen by retirees and other conservative investors.
Compared to the money market funds and ordinary checking/saving accounts, the bonds have higher return rates. But of course, there are risk factors here. There are quite a number of bonds out there. Some are more risky than the others. Just keep in mind that these bonds come with interest rates too. And knowing this, they are likely to incur interest rates if the fund value goes down and the rates go up.
Equity funds, or stocks, are types of mutual funds that are invested in publicly traded companies. Here, the objective is long term. This is because the equity funds incur capital growth. But of course, much like any other investment methods, equity funds will bring some risks. If the stocks of the company that you invested in plunges, then you may end up losing up all the money you have invested.
The idea of these types of mutual funds is to classify bonds basing on the company size and the investment manager’s investment style. If the company you have invested in grows in time, you will be able to get some returns of your investment. However, as mentioned above, if the company’s stock values go down, you lose your investment. Keep in mind that in these types of mutual funds there is a compromise that will go between the value of the company stock as well as the growth. This simply means that if the company does not grow, then the value will remain the same. A good example would be investing in a large company that has strong financial shape. As time goes by, the price of their shares fall low. This only means that you lose your investment.