What Are the Types of Mutual Funds?

There are three fundamental types of mutual funds based on the investment objective or the primary security which the mutual fund is invested in: equity funds (stocks), fixed-income (bonds), and money market funds (high liquidity instruments such as treasury bills).

The mixture of these three asset classes produces all the other types of funds. Here are some of the most famous ones:

Money Market Funds

A mutual fund that is a money market fund is an investment vehicle that uses debt instruments that are short in maturity and high in liquidity. Most money market funds consist of US Treasury bills. These are not particularly great in giving returns but it is better that a checking/savings account. The rest of money market funds include negotiable certificates of deposits, bankers acceptances, commercial paper, municipal notes, federal funds, and repurchase agreements.  This mutual fund type is known to have the lowest risk that's why it's no wonder that it’s also one of the least in earning revenue.

Bond Funds

Bond funds are the opposite of money market funds in that it invests in long-term financial instruments which are mostly government and corporate debt. It provides its investors a fixed income over a certain period of years. They pay higher returns than other investment vehicles. However, bonds carry a significant risk namely interest rate risk. This means a hike in rate means a decrease in fund value. Other risks lie on the type of bond fund. There are a wide variety of bonds such as junk bonds and government bonds. Depending on where the investment is, the risks vary.

Balanced Funds

The objective of this investment is in the name itself. Balanced funds aims to create a basket of assets that have a mixture of safety, income, and capital growth. Basically, it invests on both fixed incomes and equity funds. The most common partition between these two fund types is 60% to 40% with fixed income weighing more than equities. Allocation for each asset class is identified and may be subject to limitations.

Equity Funds

Otherwise known as stock funds, equity funds are investments made on the stock market. It makes up the majority of all the mutual funds out there with the objective of acquiring capital growth for the long-term and simultaneously generating income. It is one of the more complicated mutual fund as it must employ extensive research on what equities to include in the fund. There is a great amount of equities out there. It is up to the manager to decide which ones to include with regards to company size and investment style.

Mutual funds are popular to many because it provides more security and lesser risk compared to other investment vehicles. This is why proper research must be done to know which mutual fund type suits you.