Mutual funds are one of the most popular investments not only because of the diversification they provide, but also because of the many types available and the fact that they are managed by professional portfolio managers.
It's also important to point out that there are a number of ways that you can invest. You can invest through an employer sponsored savings plan, open a brokerage account on your own, or choose an investment advisor to help you manage your investment portfolio.
Here is a brief description of the seven most common types of mutual funds:
Money Market Funds
- One of the most relevant and consumer friendly types of mutual funds, money market funds, generally speaking, invest in short term fixed income assets.
- So far as the short term fixed income securities are concerned, they usually include deposit certificates, commercial paper, treasury bills, government bonds, bankers’ acceptance etc.
- So far as the money market mutual funds are concerned, it may be said that they are, relatively speaking, safer investment options.
- However, it must be equally remembered that though they are safer investment options, they also yield comparatively lower returns.
Fixed Income Funds
- One of the most relevant and consumer friendly types of mutual funds, the fixed income funds usually buys investments that pay a fixed rate of return.
- The investments that pay a fixed rate of return, generally speaking, include government bonds, corporate bonds such as the high yield corporate bonds and the investment grade corporate bonds.
- So far as the fixed income funds are concerned, it must be importantly noted that their primary goal is to ensure that returns are generated on a regular basis.
- Of the countless outlets possible, one of the most common could be money coming in through the interest that the fund itself earns.
- Also, so far as the fixed income funds are concerned, it must be noted that high yielding corporate bonds are generally riskier than the government bonds and the investment grade bonds.
- One of the most relevant and easily accessible funds, equity funds are primarily those that, at the most rudimentary level, tend to invest in stocks.
- Compared with the money market funds and the fixed income funds, it may be underscored that equity funds generally grow faster.
- Therefore, given that equity funds grow in a far quicker pace, it must also be noted that that these funds usually pose a higher degree of risk.
- However, the concerned investor may choose from various types of equity funds doing the rounds in the market.
- The various types of equity funds include growth stocks, large cap stocks, value stocks, small cap stocks, mid cap stocks, etc.
- Another very popular type of mutual fund is the balanced funds. At its simplest, it may be said that balanced funds invest in a blend of equities and fixed income securities.
- The balanced funds are called so as they tend to balance the goal of garnering high returns against the potential risk of losing money.
- It must be underscored that balanced funds are riskier than fixed income funds but less perilous than equity funds.
- Another very popular type of mutual fund is the index funds. As the very name suggests, these funds tend to identify the performance of a specific index such as the TSX composite index.
- According to the gradations of the index, the value of the mutual fund will rise or fall.
- It must be noted that index funds, relatively speaking, have lower costs than the otherwise actively managed mutual funds.
- The core reason behind this is that the concerned portfolio does not usually have to do research or come to important decision making situations.
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- Another very popular type of mutual fund is the specialty funds. As the very name suggests, this type of mutual fund, generally speaking, focus on specialized areas such as real estate, commodities etc.
- The assist way to demonstrate this would be to consider a practical example of a socially responsible investment.
- So far as a socially responsible investment is concerned, it typically includes investment in companies that corroborate human rights, environmental stewardship, campaigns against socially disruptive elements such as alcohol, drugs, tobacco etc.
- Also, the investment spheres may include gambling, weapons and the military. As it very clearly suggests, specialty funds are not for everyday causes or individual concerns.
- Investment in specialty funds involves both time and money and is generally meant to include a broader sphere of the common society.
Fund of funds
- As the very name suggests, it may be defined as those mutual funds which invest in other funds.
- Almost similar to the balanced funds in nature and style, the fund of funds generally tends to enforce allocation of assets and make concerned diversification relatively easier and smoother for the concerned investor.