Mutual Funds: Overview of the 3 Basic Types

Why Knowing About Types of Mutual Funds Matters

Investing in any mutual fund puts your money at risk. You may lose some, or all, of the money you invest (your principal). The value of a fund goes up and down in value because the securities held by a fund go up and down in value. Thus, your investment also goes up or down.

Even though there are thousands and thousands of mutual funds, they can be categorized into 3 basic types. Each type has different investment focus as well as different risks and rewards. Because the nature of the risks and rewards changes as the overall market and economy changes one of the basic types may perform better in some economic cycles than at other times.

Like with any investment, in general, the higher the potential return, the higher the risk of loss.

We discuss the basic types of mutual funds along with an overview of where they fit with an investment portfolio and their general risk and reward issues.

important info! Even if you work with a financial advisor, you should still learn about the different types of mutual funds. Be knowledgable about what an advisor recommends for you so you can make informed decisions that are in your best interest.

The Basic Types of Mutual Funds

Based on what they invest in, the three basic types of mutual funds are:

  • Money market funds — in general, low risk, low return. Dividends are close to short-term interest rates. Historically, the returns are lower than bond or stock funds. more details …
  • Bond funds (also called fixed income funds) — More risk than with money market funds, but there are so many different types of bonds that bond funds invest in, risks and rewards vary considerably with different funds.  More details …
  • Stock funds — Historically, stocks have performed better over the long term than other types of investments, but
    not every type of stock will perform well. There are different types of stock funds, see more details …

Summary of Types of Mutual Funds

These are the most basic types of mutual funds. Within each type are a variety of categories. Be sure to read the additional detail on other pages because the above short descriptions are meant only as a quick summary.