3 Main Different Types of Mutual Funds to Choose From |
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Go and search around, you may find that there are easily hundreds of mutual funds available in the market. You may even find it hard to remember some of the names. Too many funds can confuse you in the process of choosing suitable ones for yourself.
Do not worry, as there are basically only 3 main types of mutual funds for you to choose from, no matter what name it carries. By understanding the different types of mutual funds, you will find it much easier to look for a fund which suit you the most.
3 Main Different Types of Mutual Funds to Choose From
Equity Funds
There are mainly 3 categories of equity funds, differentiated by the market capitalization of the stocks in the their investment portfolio
Not all the stock funds are identical. The main purpose of each equity fund can be recognized by the name it carries. For instance:
Bond Funds
Bond funds are also known as fixed income funds. They invest basically in bonds and other types of debt securities. The main aim of bond funds is to provide steady streams of income to the investors via dividend payments.
Many people have misconception that bond funds have no risk. It is not true as they are also exposed to investment risks like prepayment risk, interest rate risk and credit risk. What are these risks mean?
The risk could be low if the fund mainly invest in government bond. If the fund focus on investing in high-yield corporate bonds, then the risk could be high. However, risks of bond funds are generally much lower than the equity funds.
Money market funds are a type of mutual fund which are required by law to invest in short term low risk securities. Fundamentally, they invest in certificates of deposit (CD), government securities, commercial paper of companies and other highly liquid and low-risk securities. They carry the lowest risk among the three types of funds. The aim of the funds is to earn interest for the investors while trying to keep their net asset value (NAV) of $1 per share.
Money market funds generally carry the past records of lower return in the long run compare to equity and bond funds. Hence, they may not be able to outperform the inflation rate at times, thus making them not a favourite investment tools.
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