Types of Mutual Funds
Types of Mutual Funds. What are the kinds of mutual funds that you can invest in? Here is a broad overview of the mutual fund market.
Stock funds are by far the most common type of mutual fund. They come in many varieties, depending on the investment strategy adopted by the fund:
Large Cap Funds
Large Cap Funds invest primarily in blue-chips with a market cap more than 9 billion. These are the stalwarts that usually also pay good dividends.
Mid Cap Funds
Mid Cap Funds invest primarily in businesses with a market cap between 1 billion and 9 billion. These offer a good balance of growth companies and stalwarts.
Small Cap Funds
Small Cap Funds invest primarily in businesses with a market cap less than 1 billion. These are primarily growth equities, where your returns would largely be in the form of capital gains.
More Types of Mutual Funds
Value funds adopt the value investing approach. They go all out to look for bargains in the market – good, fundamentally strong companies that are underpriced by the market.
Growth funds adopt the growth investing approach. They are out to find the next Google or Yahoo, and may thus invest in companies that may actually be more expensive than what they are really worth now. They are betting on the company’s potential for explosive growth.
Money Market Funds
Money market funds invest primarily in short term debt instruments – in particular, government debt securities. They offer significantly higher interest rates than those offered by banks, and yet offer high liquidity and low risk. Unlike the case for Certificates of Deposits, there are no charges for withdrawing money from money market funds. You can even write cheques from your money market fund account.
As the government can easily raise taxes to retire its debt, money market fund investments are considered very low risk. However, money market funds are not FDIC insured.
Money market funds offer returns typically ranging from 4 percent to 6 percent – definitely higher interest rates than those offered by savings accounts.
Bond Funds (Fixed Income Funds)
Another type of mutual fund would be a bond fund – or a fixed income fund. Bond funds invest in a variety of debt instruments that represent a broad spectrum of risk. Municipal bond funds are considered very low risk, while some corporate bond funds can be very high risk.
Bond funds are a helpful way for you to get exposure to this section of the market, though you will have to scrutinize the professional fund manager’s portfolio carefully. Make sure your risk appetite corresponds with that of the bond fund.
Types of Mutual Funds
What type of mutual fund should you go for? That depends largely on your risk appetite and the type of investment market you wish to gain exposure to.