There are so many types of mutual funds that it is difficult to classify them neatly. However, it is important to consider all the major types of funds and know their goals when making investment decisions.
Investors often do not give the costs of the fund enough consideration when deciding on what ones to purchase. Since mutual funds are generally long-term investments, this is extremely important. On top of what is paid directly to the fund over the years, when effects of compounded interest are taken into account, the differences in fees can make a significant difference over time.
Front- and back-end loads
Many mutual funds charge a percentage of the investment when the fund is purchased. This is called a front-end load. If a fee is charged after a period of time or when the fund is sold, it is called a back-end fee. In addition, there are funds that charge both types of fees but at lower percentages. Every investor needs to consider factors such as how long they are likely to keep the money invested in the fund when deciding on what is best.
Funds that do not charge either a front- or back-end load are called no-load funds. Note that all mutual funds do charge some type of annual fees to pay for management costs. However, when everything is said and done, no-load funds will generally have the lowest costs.
Electronically traded funds, or ETFs, have the lowest fees but do not have the professional management of regular mutual funds. Those most concerned with controlling costs should consider ETFs vs. mutual funds.
Major types of mutual funds
Stock funds: For most people, stock mutual funds are the first type to come to mind. These equity funds will fluctuate in value as the stock market changes with economic conditions. Stock funds can be further broken down into subcategories to include:
- Income or growth: Income (value) funds will concentrate on companies that are generally more stable and pay regular dividends. Their Price to Earnings Ratios will be relatively low, which makes them most suitable for those looking for income. On the other hand, growth funds specialize in companies that are more likely to see significant growth in share prices. With relatively high P/E ratios, they are attractive for those looking for capital gains. While growth funds offer more opportunities for dramatic gains, they are also more likely to see large losses and will pay lower dividends.
- Large, medium and small caps: Stock funds are also classified according to the size of the companies they may specialize in. As a general rule, companies with valuations of over $5 billion are considered large cap and those under a billion as small, with medium caps consisting of those companies in between.
- International domestic stocks or regional stocks: Investors often want to ensure they are invested in certain areas or diversified globally. There are types of mutual funds that are purely domestic, international mutual funds or those that cover particular regions such a group of nations which are expected to enjoy high growth.
Bond funds are another major type of mutual fund. Carrying less risk than stocks, they are attractive to those looking for steady income while preserving principal (although they do fluctuate in price). Some of the major types of bond funds include:
- Those issued by the US Treasury or government agencies. These are considered very safe but will generally pay a lower rate of return.
- Corporate bonds are those issued by companies to finance borrowing. Their level of risk will vary with the company that issues them.
- High-yield bonds (formally called junk bonds) are issued by new and untested companies that do not have established track records. Therefore, they carry more risk but higher rates of returns.
- Municipal bond funds are issued by state and local governments and are free of Federal income taxes and sometimes from state taxes.
- International bond funds invest in bonds issued by foreign governments and companies.
These are also considered a major type of mutual fund. Since these invest in Treasury Bills and other safer, short term debt, they are very stable and will often pay more than a CD but without the long-term commitments.
Various other funds
Socially responsible funds are popular with those investors who feel strongly about certain issues to include environmental protection, human rights or even health issues. For example, the fund may refrain from investing in any company that may profit from tobacco or child labor.
Balanced funds are listed last here but are certainly not least. Diversity is advisable for the vast majority of investors, and most do not want to make a separate purchase for every type of mutual fund. With this in mind, there are many funds that will offer investors coverage in various sectors such as both growth and income or asset size in a single purchase.