Types of Mutual Fund

Stock Funds

Stock funds are the most common type of mutual fund, and they invest exclusively in common and preferred stocks. They are the most volatile type of mutual fund. This category includes many different types of funds, which are designed for investors with various objectives. Typical stock funds include growth funds that seek capital appreciation through companies that are likely to experience significant growth, value funds that look for companies whose stock may be undervalued, and balanced funds that seek a combination of the two. Other popular types include sector funds that invest in particular industries, and index funds that seek to mimic the performance of a particular stock index like the Dow Jones Industrial Average or the Standard & Poor's 500, by investing in all the stocks in one of those indexes.

Bond funds are suitable for investors who are looking for long-term income. Bond funds tend to be significantly less volatile than stock funds, but their price still fluctuates depending on the movement of interest rates. Bond funds may invest in short-, medium- or long-term bonds and in bonds of varying degrees of safety. In general, funds that invest in low-rated bonds (such as "junk bonds") pay the highest returns in the short term, but in the longer term they carry the highest risk, as these bonds carry a higher probability of default. Bond funds may experience capital appreciation when interest rates are falling, but typically they are not held for this purpose.

Money market funds are funds that invest exclusively in short-term money market securities like treasury bills, certificates of deposit and commercial paper. Their goal is to provide interest income to the shareholder, not capital appreciation. Money market funds attempt to keep their net asset value fixed at $1.00 per share and are required by law to invest in low-risk securities. Many money market funds have check writing privileges, allowing the shareholder to use them essentially as interest-bearing checking accounts. Money market funds are a good place to park excess short-term cash but are not suitable for those seeking significant growth in the value of their investment.

Some stock and bond funds have a sales charge (or load) that the investor must pay to buy shares in the fund. This charge is deducted from both the initial and any subsequent purchases that the investor makes in the fund and reduces the value of her investment. Typical load charges range from 1 percent to 3 percent of the amount invested. Load funds tend to be specialized, such as sector funds, but also may be funds run by a successful or popular fund manager. By contrast, no-load funds have no sales charge and the full amount invested is used to purchase shares.

Many mutual funds are managed by so-called families, which market several different funds under one corporate umbrella. Examples of fund families include Fidelity, Vanguard, Oppenheimer, and T. Rowe Price. Investing in a fund that is part of a family has several advantages. Fund families will supply the investor with information about all of their funds, and typically only one application is required to invest in the entire family. Also, most fund families allow the investor to easily switch his investment between any of the funds in the family. Most fund families also offer money market funds as a convenient place to park cash between investments in their various funds.