What Types of Mutual Funds Are Available?

There are thousands of different mutual funds offered on the market. They range from funds that include a broad variety of investments to funds that invest exclusively in single securities or narrow sectors of the market. With the many different investment styles and objectives, there’s bound to be a number of mutual funds that are suited to your investing profile. Each of these funds has expense, risk, and return characteristics. Be sure you understand these characteristics before you invest. There are 15 principal types of funds. We have listed them according to their primary objectives: growth, income, and specialized.

Money Market Funds

Money market funds seek current income while maintaining a stable $1.00 per share net asset value by investing in short-term debt securities, including Treasury bills, certificates of deposit, commercial paper, and other highly liquid and conservative securities. They offer modest current income and no potential for capital gains. They generally are considered cash alternatives.

Money market funds are neither insured nor guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. Although money market funds seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in such a fund.

Government Securities Funds

Government securities funds invest primarily in Treasury and government agency securities. Because they are issued or guaranteed by the U.S. government, they are considered one of the safest investments. Government securities offer moderate current income and are one of the most credit worthy alternatives available. Treasury securities are backed by the full faith and credit of the U.S. government as to the timely payment of principal and interest. Government agency securities are not considered government obligations and therefore are not backed by the full faith and credit of the U.S. government. The principal vaue of these funds will fluctuate due to changes in interest rates and should an investor sell a Treasury  or agency security prior to maturity, it could be worth more or less than the original price paid.

Municipal Bond Funds

Municipal bond funds seek tax-free income by investing in the bonds of state and local governments. In many cases, it may be wise to consider municipal bond funds issued by your state because they may offer tax-free income. In some states you will have to pay income tax if you buy shares of a municipal bond fund that invests in bonds issued by other states. In addition, while some municipal bonds in the fund may not be subject to regular income taxes, they may be subject to federal, state, and local alternative minimum tax. If you sell a tax-free bond fund at a profit, there are capital gains taxes to consider. All types of bond funds are subject to the same inflation, interest-rate, and credit risks associated with their underlying bonds. Also, for all types of bond funds, the principal value will fluctuate with changes in interest rates such that as interest rates rise, bond prices typically fall, which can adversely affect a bond funds performance.

Corporate Bond Funds

Corporate bond funds invest in debt securities issues by corporations. The risk of corporate bond funds may vary depending on the objectives of the fund. Because credit risk is somewhat higher, these funds may offer higher returns than funds specializing in government securities. Principal value will fluctuate with changes in interest rate.

High-Yield Bond Funds

High-yield bond funds seek to maximize current income by investing in lower quality, higher yielding corporate bonds. The bonds held by these funds are generally rated BB or lower by rating agencies. They offer the high current yields to compensate for the greater risk of default. Since they are more volatile than and pay higher yields than investment grade bonds, they tend to be suited to investors with a high degree of risk tolerance.

International Bond Funds

International fixed-income funds invest in debt securities of foreign governments and corporations, and seek to provide current income.  Global bond funds may include U.S. government and corporate bonds.  The risks associated with investing on a worldwide basis include differences in regulation of financial data and reporting, currency exchange differences, as well as economic and political systems that may be different than those in the U.S. 

Besides growth and income, there are a variety of mutual funds that limit their investments to a particular sector, index, or other specialized investments.  Depending on your investment objectives and preference for risk, these funds might be considered additions to a portfolio containing more traditional types of funds.

Index Funds

Index funds are mutual funds that attempt to match the performance of any of several market indexes.  For example, a stock index fund may hold stocks that mirror the S&P 500 or the Dow Jones Industrial Average.  Index funds provide a broad diversification within a single type of asset class. The performance of an unmanaged index is not indicative of the performance of any specific security. Individuals cannot invest directly in any index.

Precious Metal Funds

Precious metal funds invest directly in precious metal or in the stocks of companies that mine precious metals.  Most of these funds limit their investments to gold and gold bullion or to shares in gold-mining companies.  The returns from precious metals funds come primarily from long-term capital appreciation.

Asset Allocation Funds

Asset allocation funds are those that give the manager great flexibility in deciding how to invest fund assets.  The fund manager can typically invest in all the major investment classes, including stocks, bonds, and money market securities.  The weightings of each class may vary dramatically and will reflect the market outlook and expectations of the fund manager.

Sector Funds

Sector funds invest in specific industries or sectors of the economy, such as communications, aerospace and defense, or health care.  While they may be diversified within a particular sector, they lack broad diversification.  This increases their investment risk.  These funds typically seek long-term capital appreciation.

Socially Conscious Funds

Socially conscious funds invest exclusively in the securities of socially conscious companies.  For example, this type of fund may not invest in companies that cause environmental pollution or that have interests in countries with repressive governments.

Remember also that mutual funds are sold by prospectus.  Please consider the charges, risks, expenses, and investment objectives carefully before purchasing a mutual fund.  For a prospectus containing this and other information, please contact a financial professional.  Read it carefully before you invest or send money.