Types of Mutual Funds

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on November 30, 2023

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What Are Mutual Funds?

Mutual funds have emerged as a pivotal component in the arsenal of modern investment strategies, serving as a conduit for individual investors to tap into professionally managed, diversified portfolios.

The essence of mutual funds lies in their ability to pool resources from multiple investors, thereby facilitating access to a variety of assets that might be otherwise unattainable for an individual investor.

Types of Mutual Funds

Equity Funds

Equity funds primarily invest in stocks and are often the go-to choice for investors targeting capital growth.

Their categorization is multi-dimensional, focusing on aspects like company size (large-cap, mid-cap, small-cap), geographical market (domestic, international), or investment approach (growth, value).

  • Large-Cap Funds: Tailored for investors inclined towards risk aversion, these funds focus on well-established corporations known for their market stability and potential for consistent, albeit moderate, growth.

  • Small-Cap Funds: These funds venture into the terrain of smaller companies, offering a high-risk, high-reward scenario. They are particularly attractive to investors who are willing to tolerate market volatility in pursuit of substantial growth prospects.

Fixed-Income Funds

Fixed-income funds invest in an array of debt securities, providing investors with a more predictable income stream.

These funds are segmented based on issuer types (like government bonds, and corporate bonds) and the duration of the bonds (short, medium, or long-term).

Index Funds

Index funds strive to emulate the performance of designated market indices (such as the S&P 500), offering an investment approach that is more passive and typically associated with lower management fees compared to actively managed funds.

Balanced Funds

Balanced funds blend both equities and fixed-income securities, aiming to strike a balance between risk mitigation and potential growth.

They are suited for investors seeking a middle ground between the aggressiveness of pure equity funds and the conservative nature of bond funds.

Money Market Funds

Investing in short-term, highly liquid securities, money market funds are often regarded as the safest category within the mutual fund spectrum. They cater to investors who prioritize capital preservation and liquidity over higher returns.

Sector Funds

Sector funds concentrate their investments in specific industry sectors (like technology, healthcare, or energy), providing an opportunity to capitalize on the growth potential of these sectors.

However, this specialization also introduces a higher degree of risk due to the lack of diversification across different sectors.

Target Date Funds

These funds are tailored for retirement planning, automatically adjusting their asset allocation over time. As the target date (typically the investor's retirement year) approaches, the fund gradually shifts towards a more conservative asset mix.

International and Global Funds

International and global funds enable investors to diversify their portfolios by investing in markets outside their home country.

International funds exclusively focus on foreign markets, while global funds invest both domestically and internationally.

Specialty Funds

This category encompasses funds that invest in specific niches like real estate, commodities, or those adhering to socially responsible investment principles (Environmental, Social, and Governance - ESG funds).

Exchange-traded funds (ETFs)

Although technically not mutual funds, ETFs are often discussed alongside them due to their shared characteristics. ETFs combine the diversification benefits of mutual funds with the flexibility of being traded like stocks on an exchange.

Types of Mutual Funds

Choosing the Right Type of Mutual Fund

The selection of an appropriate mutual fund is a nuanced process, requiring a deep understanding of one’s financial objectives, risk tolerance, and investment time frame.

Investors must recognize the importance of diversification not just across asset classes, but also within mutual fund categories.

However, factors like expense ratios and management fees should not be overlooked, as they can significantly impact the net returns on investments.

Advantages and Disadvantages of Different Mutual Fund Types

Equity funds offer growth potential and diversification but come with higher market risk and fees.

Fixed income funds provide stable income and lower risk, yet they face interest rate and credit risks, offering lower growth potential.

Index funds are low-cost and track market indices but don't offer the potential to outperform the market and are subject to full market volatility.

Balanced funds provide a diversified mix of stocks and bonds with moderate growth but may still face market risks and have capped upside potential.

Money market funds are known for their safety and liquidity, but they offer low returns and limited growth.

Sector funds can capitalize on specific sector growth but are riskier and more volatile.

Target date funds simplify retirement planning with automatic asset adjustment but may not suit everyone's risk profile.

International and global funds offer global diversification and access to growing markets but carry currency, political, and economic risks.

Specialty funds allow investment in specific themes but are often riskier and require specialized knowledge.

Lastly, ETFs offer flexibility and low costs but incur brokerage fees and are subject to market fluctuations, typically being passively managed.

Each fund type has unique characteristics and should be chosen based on individual financial goals, risk tolerance, and investment horizon.

Advantages and Disadvantages of Different Mutual Fund Types

How to Invest in Mutual Funds

The journey into mutual fund investments begins with setting up an investment account, either through a brokerage or directly with a mutual fund company.

The key to successful investing lies in conducting thorough research to identify funds that resonate with your investment profile and continuously monitoring and adjusting your portfolio to ensure alignment with your evolving financial goals.

Conclusion

Understanding the diverse landscape of mutual funds is an essential first step toward making informed and effective investment decisions.

While this article provides a foundational overview, the complexity of financial markets and individual circumstances necessitate personalized advice from financial advisors.

Armed with the right knowledge and strategic planning, mutual funds can serve as a robust tool in the pursuit of your financial aspirations.

Types of Mutual Funds FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.

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