Now that you have a basic understanding of mutual funds, knowing how the over 8,000 funds break down in terms of categories, types or specialties will help you in your selection process (see “Mutual Fund Basics” for definitions, investment process, and profits).

Fund Categories

With that in mind, mutual funds may differ depending on what types of stock or asset classes comprise them:

• Equity Funds: These mutual funds are made solely of company stocks. Ohio State University’s department of Family and Consumer Science notes this type of mutual fund carries the greatest level of risk, but also the greatest returns.
• Fixed-Income or Bonds Funds: These funds are made up of government or corporate securities and are designed to provide a fixed return on investment. Essentially, investment into a bond is like buying a part of the debt a company or municipality will use for operations. Instead of buying into ownership (which is done through stocks), you are buying into operations debt. Some argue there may sometimes be greater risk in bonds due to the length of the term, and the variation in quality.

Some investment strategies suggest investments in both stocks and bonds (or in this case Equity and Fixed-Income funds) as the fluctuations of both are usually in opposition to one another. By doing so, you lower volatility of your investment performance on the whole in hopes of achieving conservative, stable growth.

• Balanced Funds: This category of fund is actually the mixture of both stocks and bonds that capitalizes on the fluctuations of both asset classes. It may be possible to simply invest in a balanced fund instead of two separate categories.

In addition to these basic categories, OSU describes specialized funds that target specific industries, indices, markets or investment styles:

• International/Global Market Funds: These funds contain securities from international markets in Europe, Asia or other securities markets. They may also invest in both American and International securities in the same fund.

• Sector Funds: Sector funds invest in specific market or industry sectors like technology, healthcare, energy, etc.

• Asset-Allocation Funds: These funds invest in an array of securities and funds within a fund to achieve a certain level of growth. In can be seen as a way of achieving a portfolio with specific risk tolerance built-in by purchasing shares instead of developing such individually.

• Funds of Funds: These are mutual funds comprised of mutual funds that may fit a specific sector, security, or risk level. However, fees are assessed on the “fund of funds” as well as the funds that comprise the fund.

Keep in mind that no investments are insured are guaranteed, and there are no strategies that will always ensure returns on investment. Additionally, everyone has a certain level of risk tolerance that will affect their decision making. If you are unsure, you can talk to investment professionals for advice on your investment goals.

References

Westcore Funds. Mutual Funds Basics

Ruth Anne Mears. Start With Mutual Funds

money.howstuffworks.com. How Do Mutual Funds Work