As one of the most popular investment vehicles, there are many answers to the question, "what types of mutual funds are there?" This article covers index funds, equity funds, bond mutual funds and other types of mutual funds.
When you set out to choose a mutual fund to invest in, the choices can quickly become overwhelming. Even if you limit yourself to the mutual funds offered by a single bank or investment firm, there are usually several dozen options. If you are fortunate enough to work with a capable investment advisor, you may receive some guidance on which mutual funds will best meet your needs.
You ultimately need to understand what types of mutual fund are there out in the marketplace to invest in. Read this article and conduct further research before you start making important investment decisions such as whether you are saving for the long term, investing for retirement or some other goal.
Mutual Funds With A Geographic Focus
One of the most common and easy to understand types of mutual funds are those with a geographic focus. There are mutual funds with a country focus (e.g. American stocks) and regional stocks (e.g. European or Asian stocks). One of the main benefits to geographically-focused mutual funds is the ability to diversify. If an investor invests in mutual funds that cover North America, Europe and Asia, then they are more likely to experience growth even if one region of the world is struggling economically.
Mutual Funds By Market Capitalization
Whether you want to specialize in large blue chip stocks or small start up firms, there are mutual funds to accommodate your needs. Investors who are interested in growth (and can accept the corresponding risk) may prefer to focus on small companies. Small companies in the natural resources sector, for example, often have significant unrealized potential to make new discoveries of valuable materials. In contrast, investors who prefer the reliability, stability and dividend payments of large companies like Proctor & Gamble, AT&T and Johnson & Johnson will benefit from investing in large market capitalization (also known as "large cap") or "blue chip" companies. If you purchase a mutual fund that follows a stock index such as the Dow Jones Industrial Index, then your investment can be considered a large cap investment.
Mutual Funds By Sector
If you wish to focus your mutual fund investments on a specific sector of the economy, there are mutual funds that accommodate that need. Popular types of sector specific mutual funds specialize on financial firms, technology stocks and natural resources. Before investing in this type of specialized mutual fund, investors should have some basic understanding of the industry. For example, changes in interest rates tend in impact banks, insurance companies and other financial sector companies to a greater degree than other companies. If you are confident about the prospects of a given industry, this type of mutual fund is for you. Just remember not to put all of your investments in one sector.
Mutual Funds By Investment Strategy
Most of the mutual fund examples discussed in this article so far have focused on equities or stocks. There are also mutual funds the specialize in bonds, real estate, money markets and other types of non-equity investments. In the mutual fund market, there are two broad types of investment strategies: active investing and passive investing.
Actively managed mutual funds call on the expertise of investing experts to constantly look for high-quality investments. The disadvantage of actively managed funds are higher fees; a management expense ratio (MER) of 2% to 4% is common with such funds. In contrast, passively managed funds simply follow a stock market index like the S&P 500. As a passively managed mutual fund requires less work to run, management fees on passive mutual funds tend to be low, often 1% or less.
Interested in learning more about what types of mutual funds are out there for you to invest in? Consider some of the resources provided in this section to continue your research into the world of mutual funds.
Image Credit: Wikimedia Commons/Poco a poco
- Funds & ETF Investing, http://www.aaii.com/investing/funds-etfs
- Mutual Fund Ratings (Morningstar), http://www.morningstar.com/cover/funds.aspx