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. Stock Analysis

    Analyzing Baidu's Return on Equity (ROE) (BIDU)

    Find out how Baidu's return on equity (ROE) compares to industry peers and historical results. See how DuPont analysis treats net margin, asset turnover and leverage.
  2. Investing News

    Public Vs. Private Tech Valuations: What's Driving the Divide?

    The gross valuations over the past five years are more indicative of the market than the true value of the company itself.
  3. Budgeting

    Bespoke Post Review: Is It Worth It?

    Find out if Bespoke Post, the fast-growing, e-commerce subscription service for men's lifestyle and grooming products, is worth all of the hype in this review.
  4. Mutual Funds & ETFs

    The 4 Best American Funds for Growth Investors in 2016

    Discover four excellent growth funds from American Funds, one of the country's premier mutual fund families with a history of consistent returns.
  5. Investing

    How To Make Sure Your Healthcare Costs Do Not Ruin Your Retirement

    The best proactive plan of action for a stable retirement is to understand medical costs, plan ahead, invest properly, and consider supplemental insurance.
  6. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  7. Fundamental Analysis

    Is a U.S. Industrial Recession on the Horizon in 2016?

    Find out why the industrial economy may be teetering on an industrial recession and what could prevent it from going over the cliff.
  8. Budgeting

    Sanders' Healthcare Plan: Could it Work?

    Find out if presidential candidate Bernie Sanders' proposed single-payer health care plan could actually work in the United States.
  9. Investing Basics

    5 Questions First Time Investors Should Ask in 2016

    Learn five of the most important questions you need to ask if you are a new investor planning on starting an investment program in 2016.
  10. Retirement

    Is Retiring in France Safe Today?

    After a series of deadly terrorist incidents, some may be asking themselves this question.
RELATED TERMS
  1. Negative Interest Rate Policy (NIRP)

    A negative interest rate policy (NIRP) is an unconventional monetary ...
  2. Great Society

    Born in the turbulent sixties, the Great Society was President ...
  3. Tight Monetary Policy

    A course of action undertaken by the Federal Reserve to constrict ...
  4. Bankruptcy

    A legal proceeding involving a person or business that is unable ...
  5. Laissez Faire

    An economic theory from the 18th century that is strongly opposed ...
  6. Value Investing

    The strategy of selecting stocks that trade for less than their ...
RELATED FAQS
  1. What is arbitrage?

    Arbitrage is basically buying in one market and simultaneously selling in another, profiting from a temporary difference. ... Read Full Answer >>
  2. What is Fibonacci retracement, and where do the ratios that are used come from?

    Fibonacci retracement is a very popular tool among technical traders and is based on the key numbers identified by mathematician ... Read Full Answer >>
  3. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
  4. What is finance?

    "Finance" is a broad term that describes two related activities: the study of how money is managed and the actual process ... Read Full Answer >>
  5. What items are considered liquid assets?

    A liquid asset is cash on hand or an asset that can be readily converted to cash. An asset that can readily be converted ... Read Full Answer >>
  6. What is comparative advantage?

    Comparative advantage is an economic law that demonstrates the ways in which protectionism (mercantilism, at the time it ... Read Full Answer >>
Hot Definitions
  1. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  2. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  3. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
  4. Dark Pool Liquidity

    The trading volume created by institutional orders that are unavailable to the public. The bulk of dark pool liquidity is ...
  5. Godfather Offer

    An irrefutable takeover offer made to a target company by an acquiring company. Typically, the acquisition price's premium ...
Trading Center