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Tags: finance, stock mutual funds, types of mutual funds
 Now that you have a basic understanding of mutual funds (see “Investing in Mutual Funds – 4/24) let’s now move on to the different types of mutual funds. Knowing the different types of mutual funds can help you decide how to choose products that match not only your goals but also your risk tolerance.
When investing in mutual funds, you literally have thousands of choices, so before you invest in any given one you first need to decide whether the investment strategy and the risk they represent are a good fit for you. You need to figure out what your financial goals are and just how high your risk tolerances are.
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Once you’ve figured out and set your goals and established your risk tolerance, you can now easily narrow your choices of mutual funds. You do need to understand that each account carries with them their own different risks and rewards. The rule of thumb is: the higher the potential return, the higher the risk of loss.
While some accounts are less risky than others, all of them carry some level of risk. The accounts that you choose can never really diversify all the risks; you just need to pick one that at the very least can minimize it as much as possible. These mutual funds generally fall into one of three main categories—the money market funds, the bond or fixed income funds, and the stock or equity funds.
The money market types are usually made up of short-term debt instruments such as treasury bills. These accounts are usually the safest as they have relatively low risks involved. Money market accounts usually pay dividends reflecting the current short-term interest rates. While you won't really get great returns—they are lower than either the bond or stock ones—you won't have to worry about losing your investments.
However, there is the risk that inflation will outpace and erode your investment returns over time. And while investor losses are rare, they are still a possibility. On the other hand, the bond or fixed income accounts have higher potential risks than the money market ones. This is because these accounts generally follow strategies that are aimed at generating higher yields.
As there are different types of bonds, these bond accounts can also have different levels of risks and rewards. Some of the risks include: 1) Credit risks—that the issuers of the bonds held by the accounts will default on their debt payments; 2) Interest rate risk—that the market value of the bonds will go down as interest rates go up, and; 3) Prepayment risks—that the bonds being held will be paid off early.
The final category is the stock or equity accounts. These represents the largest category of mutual funds. Their objectives are focused on long-term capital growth with some income. Market risk poses the greatest danger for investors since stock prices can fluctuate for a broad range of reasons—from company decisions, to new government regulations, to nationwide economic performances.
There are also different types of stock funds. The Growth type has stocks that may not generate as much income but have a huge capital gains potential. The Income type invests in stocks that pay regular dividends, while the Index type follows the performance of a particular market index such as the S&P 500 or the Dow Jones Industrial Average by investing in companies included in those indexes.
Then there are the specialty accounts. The Sector type specializes in companies from a certain industry niche. The Regional type focuses on a certain world region or country, and the Socially-responsible type only invests in companies that meet certain standards. They don’t usually invest in the tobacco, alcoholic or weapons industries.
Each of the above mentioned mutual funds represent a predetermined investment objective which focuses their assets, regions of investments and investment strategies. Match it with your own objectives to find the right fit.
About the author
The author of this article Rick Goldfeller is a successful underground Financial Analyst who has been advising and coaching individuals for many years. Rick recently published a book on how to manage your money and attract Wealth and Financial Freedom. More info on his Finance Planning course is available HERE.
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