What are the types of mutual fund options available for investing?
There are several types of mutual fund schemes available in the market depending upon the type of securities that they invest in.
- Equity mutual funds
Equity mutual funds invest in common and preferred stocks of companies, and may emphasize current income, capital appreciation, or some combination of the two. These mutual funds may build portfolios that consist of stocks issued by a broad range of companies, diversified across industries, geographies and economic sectors, or they can focus on specific investment styles such as large cap, small cap, growth or value.
- Income mutual funds
Income mutual funds focus on high-quality instruments, such as Treasuries, government agencies and investment-grade corporate bonds, all of which generate interest income that is taxable by the federal government. Others may add lower-grade high-yield bonds into the portfolio, which provide attractive rates of return at a somewhat higher level of risk.
- Sector and Specialty mutual funds
Sector and Specialty mutual funds focus on stocks of a particular industry such as financial services, natural resources, technology, healthcare or on specialized securities such as preferred stocks or convertible securities. They can offer a way for investors to participate in the fortunes of a specific economic sector, industry group or specialized security, while reducing risk through owning a basket of securities.
- Global and International mutual funds
Global and International mutual funds can be the building blocks of globally diversified portfolios of stocks or fixed income investments. Funds that invest substantially in both domestic and foreign securities are called "global," while those that focus on international investments only are considered "international." Some mutual funds specialize in emerging market securities, which can be highly volatile and less liquid under adverse market conditions.
- Hybrid mutual funds
Hybrid mutual funds comprise a combination of securities, such as stocks and bonds, which can vary proportionally over time or remain fixed. Because they invest in a wide array of dissimilar securities, mixed asset funds can offer considerable diversification in a single purchase. In most cases, if the fund manager perceives a turn in financial markets, he may change the fund's mix of investments.