Types of Mutual Funds
There are several kinds of categories in mutual funds. They are different from one another considering the kinds of securities you are looking for your portfolios and the type of returns you seek. Each investor can have various style preferences and approaches for their investments. Here we introduce 7 types of mutual funds: equity funds, Index funds, money market funds, balanced funds, international funds, fixed-income funds, speciality funds.
1. Equity funds
Equity funds are often called stock funds as well. As the name identifies, these funds invest principally in stocks. Equity funds are classified into different subcategories. You can select types of your stock funds such as growth stocks, value stocks, large, mid and small-cap stocks or combinations of all types. A mutual fund may blend its strategy between investment style and company size. For instance, you may choose to invest in startup fin-tech companies with great potential growth. You are choosing a small-cap growth strategy, that is, you may blend your strategy between investment style and company size. Stock Funds try to grow faster than other types of funds, so there is a higher risk.
2. Fixed income funds
Another big group is the fixed income category. These mutual funds deal with investments that offer a set rate of return like government bonds, high-yield corporate bonds, or other debt instruments. Fund portfolio earns interest income on a regular basis and then passes on to the shareholders. Generally, compared to government and investment-grade bonds, high-yield corporate funds are much riskier to deal with.
3. Index funds
Index funds have become very popular in recent years. These funds aim to record the performance of a certain index such as the S&P 500 or the Dow Jones Industrial Average (DJIA). The value of the mutual fund will increase as the index increases. Index funds require fewer expenses from you because fund managers and analysts do not have to do much research and spend less effort to make these investment decisions.
4. Money market funds
Money market mutual funds are short-term fixed-income securities like treasury bills, government bonds and others. These funds invest in safer, high-quality, short-term debt from governments, or corporations. However, they offer you a lower potential return. Currently, this type of mutual fund consists of 15% of the mutual fund market.
5. Balanced Funds
This type of fund invests in a mix of asset classes, whether stocks, bonds, or alternative investments. Their main goal is to earn higher returns and reducing the risk of losing money. This kind of fund is riskier than fixed-income funds, but they are less risky than equity funds. Aggressive funds keep more equities and fewer bonds, while conservative funds hold fewer equities relative to bonds.
6. International/Global Funds
An international fund which is called a foreign fund focuses on assets that are outside your home country. On the contrary, global funds give you access to invest anywhere around the globe, including your own country. We can not say if these funds as either riskier or safer than domestic investments because it depends on different factors such unique country issues and political risks. Typically, investors use this kind of funds to keep a well-balanced portfolio since they can actually reduce risk by having International funds in their portfolio. These funds increase diversification, since the returns in foreign countries may be different from returns at home.
7. Specialty funds
This type of mutual fund consists of special funds such as real estate, commodities or socially responsible investing. For instance, socially responsible funds do not invest in businesses that deal with unethical activities. Such funds tend to invest in companies that have a positive impact on society. They invest primarily in companies that support environmental stewardship, green technology or recycling.
To read more about Islamic Finance related topics, please click here and visit our academy.
Feel free to sign up for our free stock screening services at Musaffa.com