There are a wide variety of mutual funds, including those that specialize in specific type of investments. Some of the more popular fund types include:
Money Market Funds
A money market fund seeks to earn interest for shareholders while maintaining a net asset value of $1 per share. Mutual funds, brokerage firms and banks offer these funds. Portfolios are comprised of short-term (less than one year) securities representing high-quality, liquid debt and monetary instruments. A money market fund's purpose is to provide investors with a safe place to invest easily accessible cash-equivalent assets characterized as a low-risk, low-return investment.
SEE: Why Money Market Funds Break The Buck and The Pros And Cons Of Money Market Funds
Bond funds invest primarily in bonds and other debt instruments. The exact type of debt the fund invests in will depend on its focus, but investments may include government, corporate, municipal and convertible bonds, along with other debt securities like mortgage-backed securities. A bond fund's purpose is to provide investors with a source of income that is generally less volatile than income derived from investments in the stock market.
SEE: Evaluating Bond Funds: Keeping It Simple and Bond Funds Boost Income, Reduce Risk
Balanced funds combine a stock component, a bond component and, sometimes, a money market component in a single portfolio. These funds generally stick to a relatively fixed mix of stocks and bonds that reflects either a moderate (higher equity component) or conservative (higher fixed-income component) orientation. A balanced fund's purpose is to provide a mixture of safety, income and modest capital appreciation.
SEE: In Praise Of Portfolio Simplicity
Equity funds invest primarily in stocks. They are principally categorized according to the size of the companies in which they invest (large cap, small cap, mid cap), the investment style of the holdings in the portfolio (growth, value, core) and geography (domestic, international).
International funds come in two varieties. The first is global funds, which invest in both foreign and domestic markets. The second is international funds, which invest only in foreign markets. These can be broad market, regional or single-country funds. For investors who live in developed nations, global and international funds generally offer both the opportunity for higher returns and the possibility of greater volatility.
Specialty stock funds invest in target business sectors such as healthcare, commodities and real estate. Because their focus is more concentrated than other equity funds, they tend to offer both the opportunity for higher returns and the possibility of greater volatility.
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