In 2020, 58.7 million households owned mutual funds, equivalent to 45.7% of all households in the US. This comes as more individuals realize the unmatched benefits of mutual funds.
Mutual funds enhance investment diversification. Also, the investments can take advantage of economies of scale, thus operational efficiencies thanks to their size.
However, not all mutual funds are created equal. This guide explains the different types of mutual funds that exist today.
Equity funds are booming, thanks to their ability to yield higher returns than most traditional types of investment. Ideally, equity funds invest in shares of stock of a company. And for this, they are at times referred to as stock funds.
Equity funds work by generating capital appreciation for investors. It will help if you include equity funds in your portfolio as early as now, so you will have more time to overcome the potential challenges in market value and make high returns in the long run.
This mutual fund can be classified into different categories, depending on the investor’s end goal. The common types of equity funds include:
- Equity-Linked savings scheme
- Index funds
- Sector and thematic funds
- Large, mid, and small-cap
Whichever type of equity funds you choose, you are assured of capital growth and tax benefits. Furthermore, equity funds enhance portfolio diversification which helps you to pool risk. For easy investment, join an alternative investment platform for assistance from experienced managers.
Fixed Income Funds
Fixed income funds are among the best mutual funds that lean more towards debt securities. Such investments include government bonds and debentures.
Fixed income funds are a great choice for any smart investor looking to reduce risk. The investment has a short maturity period of 1 to 2 years, depending on your goals.
Furthermore, fixed-income funds are a great option for investors with an Asset Allocation investment portfolio. It helps to moderate the risk of investment portfolios, not to forget that it can be used as liquidity in cases that require cash adjustments.
The common types of fixed-income funds include;
- Government bonds
- Corporate bonds
- Preferred stock
- Short-term bonds
- Municipal bonds
These types have common benefits like portfolio diversification, low risk, and high returns within a short maturity period.
As the name suggests, commodity funds are mutual funds that invest the corpus in commodities. The returns from this investment depend mainly on the performance of the commodities in the market.
Investing in commodity funds is smarter than investing directly in commodities because the manager who handles commodity funds is experienced and understands the market better; thus, profits are almost guaranteed.
The common types of commodity funds are:
- Natural resource funds
- Combination funds
- Future funds
These investments have common benefits such as reducing risk, promoting portfolio diversification, and hedging against inflation. Before hopping on this tremendously growing investment, take your time to understand the pros and cons of different commodities and settle with the most favorable.
Money Market Funds
If you are after preserving capital, money market mutual funds are the ideal investment for you. The most outstanding benefit of this investment is higher safety from volatile security markets.
Money market funds feature liquid investments such as cash equivalents, high-rated debt-based securities, and cash. The investment has short maturity periods, mostly less than 13 months.
Money market funds are classified into three main categories based on the levels of securities and maturities, to mention a few attributes. The main types are;
- Tax-exempt fund
- Government money market funds
- Treasury funds
These money market funds have similar benefits such as liquidity, high yields, and high safety levels.
Index funds are considered a smart investing idea due to their affordability and ability to generate high returns over time. For the longest time, investors have preferred index funds to other traditional investments as they find them easily manageable and a great way to diversify portfolios.
Index funds can be termed as a group of investment securities that focus on specific market segments. The funds are categorized as passive fund management. This means that they don’t necessitate the need for research analysts to select the most-suited stock.
Other benefits include low fees, transparency, and easy management.
Moreover, index funds feature a low turnover rate and taxes over capital gain. You can either purchase index funds through the help of a brokerage or look for a reliable mutual fund company. Whichever the case, take your time to search for the best index fund in the financial industry to suit your needs.
Target Date Funds
Target date funds are a common mutual fund investment among 401 (k) investors. The investment is structured to accumulate assets within a set time frame. With this, the returns from target-date funds will cater to your needs at some specified time in the future, hence the name target date.
The funds apply the traditional portfolio management method to set the target date or asset allocation period. The portfolio manager uses a predetermined time horizon to develop an investment strategy. They may also use the target date to establish the risk.
Target date funds feature low investment minimum, allowing diversification among other assets such as bonds and equities.
In addition, the investments are low maintenance. They are designed to be a one-size-fits-all investment, and the fact that the portfolios are professionally managed makes everything easier.
If you feel that target-date funds are a favorable idea for you, invest your time to search for the best option.
Balanced funds are a blend of fixed income securities and equities. Like the name suggests, this investment balances the two mutual funds to bring higher returns and mitigate the risk of losing money.
In most cases, balanced funds emulate a money split formula among the different investments. And although they feature higher risk than fixed-income funds, they certainly have lesser risk than equity funds.
Minimize Investment Risks with Different Types of Mutual Funds
Mutual funds make it easier for you to meet your investment objectives at minimal risks. Now that you understand the types of mutual funds, you can select one that meets your needs in terms of maturity period and investment style.
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