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Major Mutual Funds: Definition, Types & Overview

Instructor: Yuanxin (Amy) Yang Alcocer

Amy has a master's degree in secondary education and has taught math at a public charter high school.

After reading this lesson, you'll understand the different types of mutual funds and what each fund invests in. You'll also learn which type of fund is better suited for which kind of investor.

Mutual Funds

Anybody can invest in a mutual fund. A mutual fund is a professionally managed investment program that is funded by its shareholders. It's not just you funding your own investments; rather, you are adding your funds to the purchasing power of the fund along with all the other investors in the fund.

Many retirement investment accounts are mutual funds. Within the mutual funds group, there are actually several types of funds. We'll talk about a few of them here in this lesson.

Money Market Funds

First, money market funds are the mutual funds that invest in short-term income securities. These funds invest in things like certificates of deposit, bonds, and Treasury bills for example. Investments are geared toward the short-term, meaning less than 1 year.

This type of fund is ideal for those who want to have a fairly stable and safe fund that grows slowly and is not very likely to lose money. Just like any other investment, there are risks and you can lose money. How much your fund grows each year depends on the growth of the income securities that the fund has decided to invest in. So, your returns are variable and are not guaranteed.

Bond Funds

Bond funds, or income funds, invest in bonds. This type of fund can invest in any number of bonds. Bonds are a way for an entity such as a city, state, or corporation to raise money. People purchase bonds for a set period of time for a fixed rate of return on their investment. There are funds that invest in governments bonds, others that invest in corporate bonds, and still others that invest in municipal bonds. All of these are considered bond funds.

This type of fund, as its other name (income fund) suggests, is for those looking to earn a steady income from the fund. Retirees and conservative investors are the usual investors in this type of fund, which usually provides a fixed return each year.

Equity Funds

Equity funds are mutual funds that invest in the stock market. There are many types of funds in this category. Some funds invest in small stocks from small companies valued at under $2 billion, such as Ancestry.com, while others invest in medium size stocks from medium size companies valued between $1 and $4 billion, such as Scotts Miracle-Gro. Other funds invest in larger stocks from large companies with a valuation over $5 billion, such as Apple. The larger the stock size, the safer the investment generally is. However, the growth potential is typically lower. Equity funds can get very specific as well. For example, you can have a fund that only invests in small technology startups with great growth potential.

Because equity funds are so versatile, almost anyone can find one that suits their particular investing style. For example, if you are an adventurous investor looking for large growth, you can choose a fund that invests in more risky stocks with a higher potential for growth. On the other hand, if you are a conservative investor, you can still find a fund that invests in large stocks with slow and steady growth.

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