The Different Types of Mutual Funds

Anyone who is thinking about investing in a mutual fund should become familiar with the different types of mutual funds available and select a fund that is appropriate for their own personal financial situation. Potential investors should also note that there is market risk involved when investing in mutual funds and this risk can include loss of principal.

Money Market Fund: A Money Market Fund is required by law to invest in low-risk securities that might include government securities, certificates of deposit and high-grade commercial paper. The interest or dividend earned can be withdrawn by the account owner or used for further investing activity associated with the fund.

Growth Fund: A Growth Fund is a diversified portfolio of stocks that primarily seek capital appreciation. These types of funds typically offer little or no dividend payouts. Growth funds may seek long-term capital gains by seeking companies with above-average earnings growth that reinvest their earnings for expansion and acquisition.

Aggressive Growth Fund: An Aggressive Growth Fund, like a growth fund, primarily seeks long-term capital gains and invests in common stock for this purpose. While these companies can offer high growth potential, they are usually accompanied by significant share price volatility and so may not be appropriate for risk-averse investors.

Income Fund: An Income Fund emphasizes income for its investors through dividends or coupon payments from bonds or preferred stocks. Income funds are more conservative investments than growth funds, avoiding the volatility that accompanies those stocks. Income funds can be a good investment choice for retirees and other investors seeking cash flow without significant risk to their principal.

High Income Fund: High Income Funds seek higher income than more traditional income funds by assuming a higher degree of risk. These funds will often invest in below-investment grade debt securities or junk bonds. High income funds may not be appropriate for risk-averse investors.

Balanced Fund: A Balanced Fund combines stocks, bonds, and possible a money market component, into a single portfolio. A balanced fund seeks long-term growth opportunities through its equity component while looking to generate income through debt securities.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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