Trying to figure out which mutual fund to purchase can be a challenge! There are so many different types; where does one even start? We’re going to look at the different types of mutual funds, which really is the first step to finding a fund that fits your needs.
At the most basic level, there are 4 main types of funds:
Equity Funds (Stock)
These funds that invest in company stocks are by far the largest category of funds. The objective of these funds tends to be centered on long-term growth with some income generation. There are numerous types of equity funds because there are many types of stocks. Some of the different classifications would include:
- Global: Invest around the world, which could include your own country
- International: Invest in countries outside of your own
- Large-Cap: Companies with over $10 billion worth of total stock value
- Mid-Cap: Companies between $2 billion and $10 billion worth of total stock value
- Small-Cap: Companies with less than $2 billion worth of total stock value
- Sector Funds: Target certain markets, such as technology, health, financial, and more
- Index Funds: Seek to mirror a specific index, such as the NASDAQ or the NYSE
Fixed Income Funds (Bond)
- These funds focus on purchasing government and corporate debt. While this sounds very simple, there are a wide variety of bond funds, the main differences being the amount of risk associated with the bonds being purchased.
- So a bond fund that invests in junk bonds is going to have a much higher level of risk than a fund that invests primarily in government bonds. But if everything goes according to plan, the junk bond fund should provide a much higher return.
Money Market Funds
- These funds only invest in short-term debt, like Treasury bills. The rate of return is better than your typical savings account, but not by much. These funds are typically used as an alternative to a conventional savings account.
- Balanced funds invest in both stocks and debt instruments. Again, there are a wide variety of funds, depending on the types of equities and the types of debt it purchases.
Now that you know the basics, it will make your challenge of choosing a mutual fund much easier. Keep increasing your investment IQ; after all, it’s your money.