Mutual fund investments can be classified into three types – money market funds, bond funds and stock funds. When investors are deciding which to utilize, they should consider investment strategies needed for each and their level of risk tolerance. Each type of mutual fund investments has different features and various risks and rewards. In general, the higher the return potential, the higher the risk of loss will be. Here we will discuss the three most common types of mutual funds.
Money Market Funds
Of the three types of mutual fund investments, money market funds are considered to have the lowest risks. By law, money market funds are only able to be invested in specific high quality and short term investments that are issued by the U.S. government, U.S. corporations, and state and local governments. This type of mutual funds attempts to stabilize its net asset value (NAV) at $1.00 per share. Because of this, investor losses are rare, but can still happen.
Money market funds pay dividends that reflect short term interest rates, generally less than one year. Traditionally, this type of mutual fund investments produces smaller returns than both bond and stock funds, but in short term situations have less of a risk of loss.
Bond funds conventionally have higher risks than money market funds, but are more likely to produce higher yields. This is because bond funds are not restricted to high quality and short term investments as money market funds are. Examples of investing in bond funds are U.S. Treasury and company bonds. Risks with this type of mutual fund investment include credit, interest rate and prepayment risks. All investors need to thoroughly research any mutual fund investment before purchasing.
Stock funds, also known as equity funds, are valued higher for long term situations. In short term investments, stock funds will fluctuate dramatically. But over time they have historically performed better than other types of investments. Overall, stock funds present the highest potential risk for investors. Stock prices can rise and fall quickly for various reasons and stockholders should prepare for this.
Within this type of mutual fund investments, there are multiple categories of stock funds. These include growth funds, income funds, index funds and sector fund. Investors interested in stock funds should investigate before choosing any form mutual fund investments.