5 Types of Mutual Funds
To put it simply, a pool of money by people with similar risk tolerance, managed by a manager and being invested in a pre-defined financial instrument is known as mutual fund. They do not all necessarily invest in stock market. For example, some mutual funds also invest in gold. One of their advantages is the quick liquidity that they provide. There are various other types of mutual funds. Let us have a glimpse through the various types of mutual funds:
Money Market Funds: Mutual funds that invest in short-term fixed-income securities such as government bonds, treasury bills, bankers’ acceptances, commercial paper and certificates of deposit are known as money market funds. These funds are generally safe; however, their rate of returns is generally lower than those of other funds. These funds are usually open-ended. They are widely considered as safe as bank deposits yet providing a higher yield. Thus, their typical returns are slightly more than what you get with a savings account.
Equity Funds: Equity Funds are funds that invest in stocks. These funds usually grow faster than money market funds. However, the risk involved with these funds is slightly higher as they may be affected by market volatility. It is advisable to invest for long duration in equities. The case is same for equity funds. It is advisable to invest for a long-term even with equity funds. There are various sub-types of equity funds like sector funds, which invest in a particular sector of equities, index funds, which aim to mirror the performance of a particular index, and so on.
Balanced Funds: These funds are basically a hybrid of the above-mentioned two funds. They get you the best of both money market and equity funds. They can be open-ended or interval funds. They tend to negate the effects of the volatile market by investing in fixed-income debt market instruments. Asset allocation fund is a similar type of fund. These funds do not hold a specified percentage of any asset class.
Commodity funds: These are mutual funds that invest neither in money market nor in equities; they invest in commodities. The most common type of commodity fund is Gold Funds. Any commodity fund can be further classified as commodity ETF and commodity sector fund. These funds are usually short-term funds. Commodity funds are essentially a sub-part of specialty fund. The other types of specialty funds are real estate funds, socially responsible investing funds and so on.
Fund of Funds: Funds that invest in other well-performing funds, expecting to mirror their performance, are called fund of funds. They pre-specify the mutual funds that they will buy or the kind of schemes they intend to invest. These are usually open-ended funds.
In a nutshell
Mutual funds, while subject to market risks are very good options when it comes to investing. You get to choose from an array of funds. They have the potential to generate great returns in the long-term.
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