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. Investing

    Time to Bring Active Back into a Portfolio?

    While stocks have rallied since the economic recovery in 2009, many active portfolio managers have struggled to deliver investor returns in excess.
  2. Chart Advisor

    ChartAdvisor for November 27 2015

    Weekly technical summary of the major U.S. indexes.
  3. Retirement

    Suddenly Pushed into Retirement, How to Handle the Transition

    Adjusting to retirement can be challenging, but when it happens unexpectedly it can be downright difficult. Thankfully there are ways to successfully transition.
  4. Mutual Funds & ETFs

    The Democratization of the Hedge Fund Industry

    The coveted compensations of hedge fund managers are protected by barriers of entry to the industry, but one recent startup is working to break those barriers.
  5. Investing

    What a Family Tradition Taught Me About Investing

    We share some lessons from friends and family on saving money and planning for retirement.
  6. Retirement

    Two Heads Are Better Than One With Your Finances

    We discuss the advantages of seeking professional help when it comes to managing our retirement account.
  7. Financial Advisors

    Tips on Passing the CFA Level I on Your First Attempt

    Obtain valuable tips and helpful study instructions that can help you pass the Level 1 Chartered Financial Analyst exam on your first attempt.
  8. Professionals

    The Best Financial Modeling Courses for Investment Bankers

    Obtain information, both general and comparative, about the best available financial modeling courses for individuals pursuing a career in investment banking.
  9. Stock Analysis

    These are Twitter's 4 Biggest Bets for Next Year

    Looks at Twitter's plans for 2016 under CEO Jack Dorsey, who has returned to lead the company he founded seven years after he was replaced.
  10. Investing Basics

    Why Interest Rates Affect Everyone

    Learn why interest rates are one of the most important economic variables and how every individual and business is affected by rate changes.
  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. Are secured personal loans better than unsecured loans?

    Secured loans are better for the borrower than unsecured loans because the loan terms are more agreeable. Often, the interest ... Read Full Answer >>
  2. Is Israel a developed country?

    Israel is considered a developed country, although it has substantial poverty and large income gaps. The International Monetary ... Read Full Answer >>
  3. Can personal loans be included in bankruptcy?

    Personal loans from friends, family and employers fall under common categories of debt that can be discharged in the case ... Read Full Answer >>
  4. How many free credit reports can you get per year?

    Individuals with valid Social Security numbers are permitted to receive up to three credit reports every 12 months rather ... Read Full Answer >>
  5. Is the Wall Street Journal considered to be a conservative publisher?

    The Wall Street Journal is controlled by Rupert Murdoch via Dow Jones Publications, which in turn is owned by Murdoch's News ... Read Full Answer >>
  6. Is Spain a developed country?

    Spain is a developed country. Nearly all organizations that analyze development status classify it as such. Spain has a strong ... Read Full Answer >>
Hot Definitions
  1. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  2. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  3. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  4. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  5. 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 ...
  6. 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 ...
Trading Center