Mutual Funds invest in a number of different asset classes.
Money market funds invest in short-term fixed income securities such as government bonds and treasury bills. They are generally a safer investment, but with a lower potential return then other types of mutual funds.
Fixed income funds buy investments paying a fixed rate of return like government bonds, investment-grade corporate bonds and high-yield corporate bonds. They aim to have money coming into the fund on a regular basis through interest that the fund earns. High-yield corporate bonds are generally riskier than government and investment-grade bonds.
Equity funds invest in stocks. These funds aim to grow faster than other funds, so there is usually a higher risk that you could lose money. You can choose from different types of equity funds including those that specialise in growth stocks (which don’t usually pay dividends), income funds (which hold stocks that pay large dividends), value stocks, large-cap stocks, mid-cap stocks, small-cap stocks, or combinations of these.
Balanced funds invest in a mix of equities and fixed income securities. They try to balance the aim of achieving higher returns against the risk of losing money. Most of these funds follow a formula to split money among the different types of investments. They tend to have more risk than fixed income funds, but less risk than pure equity funds. Aggressive funds hold more equities and fewer bonds, while conservative funds hold fewer equities relative to bonds.
Index funds aim to track the performance of a specific index such as the S&P 500 Index. The value of the mutual fund will go up or down as the index goes up or down. Index funds typically have lower costs than actively managed mutual funds because the portfolio manager doesn’t have to do as much research or make as many investment decisions.
Specialty funds focus on specialised mandates such as real estate, commodities or socially responsible investing. A socially responsible fund may invest in companies who support environmental stewardship, human rights and diversity, and avoid companies involved in alcohol, tobacco, gambling, weapons and the military.
Fund-of-funds invest in other funds. Similar to balanced funds, they try to make asset allocation and diversification easier for the investor. Fund of funds management charges tend to be higher than stand-alone mutual funds.