- Mutual funds fall into four main types: equity funds, bond funds, hybrid funds, and money market funds.
- Equity funds tend to be riskier, while bond funds are generally more risk averse.
- Knowing the different types can help investors find the one that best suits their financial goals.
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Mutual funds are among the most popular ways to invest. They pool investors’ money to create a large portfolio of stocks and bonds, or even commodities like precious metals or raw materials. Mutual funds do the research and investment for you and are therefore one of the easiest ways to diversify your assets.
Investors looking into mutual funds can be faced with an overwhelming number of choices. Varying investment objectives, management approaches, and target securities account for the biggest difference between the main types of mutual funds. And different types often have very different risk factors and investment outcomes. In the broadest sense, there are four main types of mutual funds: equity funds, bond funds, hybrid funds, and money market (or short-term debt) funds. We’ll go over these in detail below.
1. Equity Funds
Equity funds invest in stocks from corporations anywhere in the world. These funds are among the most popular.
Equity funds focus on more aggressive investment growth than other mutual fund types, particularly over the long term. Because equity funds seek high rewards, they are considered higher risk. However, over the long term equity funds can generate a much higher yield than other mutual funds. Though stock investments can be volatile, equity funds offer more portfolio diversity than many of the other mutual fund types and individual stock investments.
When talking about equity funds, they are typically further broken down into various categories depending on their makeup and investment objectives. These include:
Funds based on company size
Equity funds that are based on the market value of the companies they invest in are broken down into three main groups:
- Large-cap — (more than $10 billion)
- Mid-cap — (between $2 billion and $10 billion)
- Small-cap — (between $300 million and $2 billion)
“Remember there are more than 10,000 equity mutual funds, yet there are only 2,800 stocks that trade on the New York Stock Exchange,” says Clark Kendall, president and CEO of Kendall Capital. “Equity mutual funds do a great job of…