Mutual funds, which pool money from thousands of investors to purchase bonds, stocks and other investment products, range widely in their specific goals, styles of investment and management. Options include low risk products, solid and high-risk fund markets and products that capture the best of all mutual fund investments to meet your financial goals.
Money Market Funds
Money market funds tend to carry the lowest risk of any mutual fund, as they are legally bound to invest in low risk securities. Money market funds attempt to replicate the low risk of investment banking while providing a slightly higher rate of return. These types of funds are not designed for long-term gains or much above-average profit margin. The main functions of money market funds are security, convenience and liquidity. Though money market funds are not insured by the Federal Deposit Insurance Corp., the value of each share tends to stay at around $1. Many of these funds allow you to write checks against your account and to avoid capital gains taxes when you withdraw parts of your investment.
Fixed Income Funds
Fixed income funds, also known as bond funds, tend to be slightly riskier than money market funds and slightly more profitable. However, bonds can have a wide variety of risk and potential profit depending on who issues them. Bond funds buy debt from various entities such as corporations, governments and municipalities. They produce income in regular increments when the debtor pays the fixed interest. These funds are geared toward providing investors with a regular source of income. Risks involved in bond funds include depreciation of value through interest rate fluctuations and the risk that debtors will default on their debts, rendering the bonds worthless.
Equity funds invest in the stock market. Broadly speaking, they are the riskiest and most diverse kind of mutual fund, with the greatest potential for high returns. Equity-based funds must take into consideration the performance of certain sectors in the economy and the potential of individual firms. They are ideally set up to tap into specialized fields and industries. For example, aggressive growth funds focus on big middle-term profits through investment in midsized businesses that are projected to grow substantially. Other equity funds specialize in overseas investments and are able to take advantage of foreign market trends. Others stick to proven sectors and companies.
Most mutual funds invest in a mixture of money market, fixed income and equity funds, and their aim is to provide a balance of tolerable risk, good returns and convenience based on the needs of the investor. This is done through diversity and specialization. One common mixture is investment in stocks and bonds to produce long-term profit, combined with stable bonds to balance out risk and provide regular income. Some funds are constantly readjusted and balanced to meet the needs of an investor at a certain target date. Some funds are geared toward giving investors a stable retirement plan. Still others, such as index funds, attempt to replicate the returns of an entire market index.
Linda Ray is an award-winning journalist with more than 20 years reporting experience. She's covered business for newspapers and magazines, including the "Greenville News," "Success Magazine" and "American City Business Journals." Ray holds a journalism degree and teaches writing, career development and an FDIC course called "Money Smart."