Mutual Fund Accounts - Types of Mutual Funds

Mutual funds can be classified as either diversified or non-diversified. In order to be considered diversified, a fund must meet the following criteria:

  • At least 75% of assets must be invested in securities.
  • No more than 5% of assets may be invested in any one issuer.
  • The fund must not hold more than 10% of voting securities of any one issuer.

These criteria are required only at the time of investment. Therefore, if a fund invests 4% of its assets in a single stock and the stock rises in value, the fund is still considered a diversified fund - even if the stock now represents 6% of the fund's assets.

There are more than 8,000 mutual funds on the market today. The objectives of these mutual funds vary depending on the goals of the portfolio manager. Determining which mutual fund best suits a particular investor requires knowing the financial needs, investment objectives and risk tolerance of that person. The most common types of mutual funds include:

Money Market Funds
Money market funds invest in short-term debt instruments of one year or less. Investors can withdraw money at any time with almost no risk of loss of principal. In other words, money market funds are extremely liquid and are used for portions of an investor's portfolio that require safety of principal. Returns will vary with short-term interest rates, but the common goal of most money market funds is to maintain a net asset value of $1 per share.

Bond Funds
As the name suggests, bond funds are mutual funds that invest solely in bonds. An investor who purchases a bond fund seeks current income along with preservation of capital. Because bond funds are made up of individual bond issues, they are subject to the same types of risks associated with individual bonds, such as credit risk, call risk, interest rate risk and reinvestment risk.

They are grouped into categories according to the types of bonds in which they invest:

  • Government Bond Funds: Government bond funds invest in Treasury securities, agency securities like Freddie Mac or Ginnie Mae, and cash and equivalents. Government bond funds will provide investors with a source of current income, along with a greater amount of credit safety than other types of bond funds. While these funds are relatively less volatile than other bond funds and have little credit risk, they are still very interest-rate sensitive.

  • Municipal Bond Funds: Municipal bond funds consist exclusively of municipal bonds. They can be state-specific, national or insured; this will depend on the objective of the fund. For instance, a management company may issue a fund that invests only in municipal bonds from a single state, such as Illinois or New York, in which case investor residents of those states will receive double tax-free - and in some instances, even triple tax-free - income. These funds are known as single-state municipal bond funds. A national municipal bond fund will contain bonds from all U.S. states, and income from the fund will be federally tax free. Insured municipal bond funds have a portfolio made up of municipal bonds that are insured for the timely payment of principal and interest, making them AAA rated and very safe investments. Like national municipal bond funds, these funds also provide income that is free of at least federal tax.

  • Corporate Bond Funds: Corporate bond funds invest in bonds issued by numerous corporations. There are several types of corporate bond funds, depending on the investment grade of the bonds within the fund portfolio. For instance, one corporate bond fund may have most of its holdings weighted in higher-grade corporate bonds, such as those rated A and better, while another corporate bond fund may contain a greater mix of investment-grade corporate bonds, including BB grade through AAA. These funds are appealing to investors who want a higher return than what a government bond fund can provide.

  • High-Yield Bond Funds: High-yield bond funds invest in bonds that are rated below investment grade by Standard & Poor's or Moody's (i.e. junk bonds). That is, most of these funds' holdings are below BBB grade. They may pay higher returns, but there is greater credit risk associated with the bonds that make up the mutual fund. These funds tend to do well as the economy improves because the risk of default decreases for companies that issue junk bonds.

Balanced Funds
Balanced funds divide their assets between stocks and bonds. The proportions of each investment vehicle will vary with market conditions and decisions made by the portfolio manager. Balanced funds tend to be less volatile than funds that invest only in stocks. Usually, the goal of a balanced fund is to even out market advances and declines.

Equity Income Funds
Equity income funds invest in companies that pay high stock dividends. Many of the holdings will be mature companies that have less potential for capital appreciation but also are more stable than growth companies. These funds may also include securities from industries that traditionally pay higher dividends than other sectors, such as utilities, REITs, energy stocks and financials. The primary investment objective is current income.

Other Types of Mutual Funds
Related Articles
  1. Taxes

    Tax Breaks For Volunteering

    Your volunteer ventures could earn you some welcome tax deductions, along with the satisfaction of helping others.
  2. Retirement

    5 Secrets You Didn’t Know About Traditional IRAs

    A traditional IRA gives you complete control over your contributions, and offers a nice complement to an employer-provided savings plan.
  3. Retirement

    Is Working Longer A Viable Retirement Plan?

    Fully funding someone’s life for three decades without work is tricky. The result is retirement has become, for many, a 30-year adventure.
  4. Retirement

    Don’t Retire Early, Change Careers Instead

    Though dreamed of by many, for most, early retirement is not a viable option. Instead, consider a midlife career change.
  5. Taxes

    Six Ways Your Tax Preparer Knows You’re Lying

    Cheating on your taxes is asking for trouble. You might get away with it, but you’re playing with fire and likely to get burned.
  6. Budgeting

    Preventing Medical Bankruptcy

    If you’re worried medical expenses could overwhelm you, there are some thing you can do to ease your concerns.
  7. Insurance

    Medicare 101: Do You Need All 4 Parts?

    Medicare is the United States’ health insurance program for those over age 65. Medicare has four parts, but you might not need them all.
  8. Investing

    Where the Price is Right for Dividends

    There are two broad schools of thought for equity income investing: The first pays the highest dividend yields and the second focuses on healthy yields.
  9. Economics

    Investing Opportunities as Central Banks Diverge

    After the Paris attacks investors are focusing on central bank policy and its potential for divergence: tightened by the Fed while the ECB pursues easing.
  10. Retirement

    Using Your IRA to Invest in Property

    Explain how to use an IRA account to buy investment property.
  1. Brand Identity

    Brand identity is the way a business wants consumers to perceive ...
  2. Elastic

    A situation in which the supply and demand for a good or service ...
  3. Earnings Stripping

    Earnings Stripping is a commonly-used tactic by multinationals ...
  4. Skinny Down Distribution

    Skinny down distribution is corporate practice of slimming down ...
  5. Education Loan

    Money borrowed to finance education or school related expenses. ...
  6. Dead Cat Bounce

    A temporary recovery from a prolonged decline or bear market, ...
  1. Can you have both a 401(k) and an IRA?

    Investors can have both a 401(k) and an individual retirement account (IRA) at the same time, and it is quite common to have ... Read Full Answer >>
  2. Are 401(k) contributions tax deductible?

    All contributions to qualified retirement plans such as 401(k)s reduce taxable income, which lowers the total taxes owed. ... Read Full Answer >>
  3. Are 401(k) rollovers taxable?

    401(k) rollovers are generally not taxable as long as the money goes into another qualifying plan, an individual retirement ... Read Full Answer >>
  4. Can FHA loans be used for investment property?

    Federal Housing Administration (FHA) loans were created to promote homeownership. These loans have lower down payment requirements ... Read Full Answer >>
  5. Is Apple Pay safe and free?

    Apple Pay is a mobile payment system created by Apple to reducing the number of times shoppers and buyers have to pay for ... Read Full Answer >>
  6. Do FHA loans have private mortgage insurance (PMI)?

    he When you make a down payment from 3 to 20% of the value of your home and take out a Federal Housing Administration (FHA) ... Read Full Answer >>
Hot Definitions
  1. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  2. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  3. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  4. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  5. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
  6. Indemnity

    Indemnity is compensation for damages or loss. Indemnity in the legal sense may also refer to an exemption from liability ...
Trading Center