Different Types of Mutual Funds

Key Takeaways

• There are different types of mutual funds designed to meet various investment goals and risk appetites.

• As the most popular type, equity funds provide the highest potential returns with high levels of uncertainties or risks.

Mutual funds offer an easy and smart way to diversify your investment, usually in stocks, bonds, debts, and so on. 

There are different types of mutual funds to suit investors' diverse investment goals and risk appetites. Understanding each type of mutual fund is vital for choosing the right fund that fits your investment strategy.

Types of mutual funds

Generally speaking, there are five common types of mutual funds: equity funds, fixed-income funds, money market funds, balanced funds, and index funds.  

Those mutual funds, with different features, have one thing in common: the risks are proportional to the returns. Some have high risks but high potential returns, and some have low risks but average returns. Here's a detailed look at the most common types of mutual funds.

• Equity funds

Equity funds are one of the most popular mutual funds, which give investors access to the stock market. 

Compared with other types of funds, equity funds may bring higher potential returns, but also have greater potential volatility. Therefore, they're more suitable for aggressive investors who pursue high returns. To spread around risks, equity funds usually build a portfolio of stocks over a range of industries.

• Fixed-income funds

Fixed-income funds, also known as bond or debt funds, provide easy access for investors to participate in bond and debt markets.  

If you expect stable returns, these funds may be suitable choices. Unlike equity funds, fixed-income funds aim to have moderate but relatively stable returns by investing in government bonds, investment-grade corporate bonds, high-yield corporate bonds, and other debt instruments. 

• Money market funds

Money market funds (i.e., Cash management funds), another major type of mutual fund, often invest in short-term debt instruments, cash, and cash equivalents of lower risks, such as Treasury bills, certificates of deposit, and government bonds. 

Money market funds can provide you with high liquidity through low levels of risks and returns. Those instruments are generally short-term and high-quality interest-bearing securities, which makes money market funds a safer choice.  

• Balanced funds

If you are looking for a combination of moderate returns with comparatively low risk, a balanced fund could be an ideal choice.

This kind of fund invests in various asset classes, including stocks, bonds and money market instruments. 

• Index funds

Index funds are designed to track particular specific indexes, such as $S&P 500 index(.SPX.US)$ and $NASDAQ(200302.US)$ indexes.

These funds should mirror the performance of the underlying index. Unlike actively managed mutual funds, index funds provide a wide range of market exposure but also offer lower transaction cost options because they rely less on fund managers.