Like carmakers and fashion designers, mutual fund companies offer their products in a wide variety of styles to meet the varying needs of investors. When deciding which mutual fund or funds would be best for you, it’s important to learn about all of the types of funds available.
At a high level, most funds can be classified into one of three general categories defined by the types of assets in which they invest. Although mutual funds are typically diversified within their asset class, they still carry the risk of loss of capital. Here are the three primary categories of funds:
- Stock funds, also known as equity funds, invest in stocks. Stock funds historically have delivered better long-term returns than bond funds, but with more volatility. They are thus considered a riskier, but higher-growth, investment.
- Bond funds, also known as fixed-income funds, invest in bonds. Bond funds are most appropriate for investors seeking income. Historically bond funds have generated lower long-term returns than stock funds, but with less volatility. They are thus generally considered a more conservative investment, although risks vary based on the type and quality of bonds held by a fund.
- Mixed-asset funds, also known as asset allocation funds, invest in both stocks and bonds. They seek to deliver the benefits of broad diversification—spreading one’s investment risks over many different types of assets—in a single fund. Although stock and bond funds are diversified within their asset class, mixed-asset funds can help provide a greater level of diversification.
Beyond these broad categories, there are many subcategories of funds which are distinguished by such factors as the types of securities they own, the level of risk they present, and their investment horizon. By category, they include: