The most important thing to remember while in mutual funds is that in which type of mutual fund you are investing. No matter what kind of investor you are but the objectives of particular mutual fund which is chosen by you for investment is meeting your expectations or not. Each mutual fund has some objectives associated with it hence it becomes important to understand the risks and rewards of that mutual fund. Generally high potential return is directly proportional to higher risk of loss. Initially mutual fund can be categorized under three varieties:
- Equity Funds (stocks)
- Fixed-income funds (Bonds)
- Money market funds
All other funds are variations of these three asset classes. Let us discuss these in detail. What is Mutual Fund?
Money Market Funds: This is considered to be a safe place to invest your money. Money market consists of short term Treasury Bills. Here returns will not be high but also the risk of losing your principal is very low. It will return you twice the amount you will get in a regular savings account.
Bonds or Fixed Income Funds: These funds are named correctly as the main purpose of these funds is to provide steady cash flow to investor. Generally the investment is done in government. They provide income to the investor on steady basis. Bond funds generally pay higher returns than money market funds but the risk associated with Fixed Income funds is also high. Bond funds can vary depending upon where they invest. Investing in government securities is not that much risky as specializing in high yield junk bonds.
Equity Funds: The largest category of mutual funds are invested in stock. Investment in equity fund is done with an objective of long term capital growth with some income. Based on different types of equities, equity funds can be categorized differently.
Global/ International fund: An international fund invests only outside your home country while the global fund invests anywhere around the world including your home country. It is difficult to classify these funds as riskier or safer than domestic investment. They can be a part of balanced portfolio, actually reduce risk by increasing diversification.
Specialty Funds: This type of mutual fund forgoes broad diversification to concentrate on a certain segment of the economy.
Sector Funds: These funds are highly specific to a sector of the economy such as health, financial, technology etc. These may give high returns but you to accept that your sector may tank.
Regional Funds: They allow us to focus on a specific area of the world. It leads to focus on a region or an individual country. Regional Funds make it easy to buy funds in foreign countries which is otherwise difficult.
So you should better investigate before investing in any of the mutual funds. Since rewards and risks associated with each type of mutual fund is different.