Types Of Mutual Funds Explained

December 12, 2022 (December 13, 2022) . By Asefa Hafeez

Table of Contents

Classification of mutual funds

There are many different types of mutual funds and they can be classified in a number of ways. There are five major ways to classify mutual funds, these are based on:

Structure
Asset class
Investment goals
Risk appetite
Industries or specialized mutual funds

Let’s discuss each of these in detail.

Types of mutual funds based on structure

There are also several different types of mutual funds based on their structure. Some of the main types of mutual funds based on structure include:

Open-end mutual funds, which are the most common type of mutual fund. These funds have an unlimited number of shares, and investors can buy and sell shares directly from the fund at the fund’s net asset value (NAV) on any business day.

Closed-end mutual funds, which have a limited number of shares that are issued in an initial public offering (IPO). Unlike open-end mutual funds, closed-end mutual funds are traded on a stock exchange, and the price of the shares may be higher or lower than the fund’s NAV.

Exchange-traded funds (ETFs), which are similar to closed-end mutual funds but are typically more liquid and more flexible. ETFs trade on a stock exchange and can be bought and sold throughout the day like stocks, but they typically track a market index or a basket of securities like a mutual fund.

Unit investment trusts (UITs), which are similar to mutual funds but have a fixed portfolio of securities that doesn’t change over time. UITs are structured as trusts and are typically held until they mature, at which point investors can redeem their shares for the underlying securities or cash.

Each type of mutual fund structure has its own advantages and disadvantages, and the right choice for an investor will depend on their investment goals, risk tolerance, and other factors. It’s always a good idea to consult with a financial advisor or a mutual fund company before investing in a mutual fund.

Types of mutual funds based on asset class

Before we understand, the various types of MF in this category, let us first understand what is an asset class.

An asset class is a group of investments that have similar characteristics and are subject to the same laws and regulations. The three main asset classes are stocks, bonds, and cash equivalents. These asset classes can be further divided into several different subclasses.

Stocks: Stocks are securities that represent ownership in a company. The value of a stock can go up or down depending on the company’s performance and other factors. Some of the main subclasses of stocks include large-cap stocks, small-cap stocks, growth stocks, and value stocks.

Bonds: Bonds are debt securities issued by governments, municipalities, and companies. Investors who buy bonds are lending money to the issuer in exchange for regular interest payments and the return of principal at maturity. Some of the main subclasses of bonds include Treasury bonds, corporate bonds, municipal bonds, and high-yield bonds.

Cash equivalents: Cash equivalents are investments that are highly liquid and considered to be as safe as cash. Examples of cash equivalents include money market funds, certificates of deposit (CDs), and Treasury bills.

In addition to these main asset classes, there are also other types of investments that can be grouped into asset classes based on their characteristics. For example, real estate, commodities, and alternative investments (such as hedge funds and private equity) are all considered to be separate asset classes. It’s important for investors to understand the different asset classes and how they can be used to create a diversified investment portfolio.

Types of mutual funds based on investment goals

In addition to the different types of investments based on asset class, there are also several different types of investments based on investment goals. Some common investment goals include:

Capital preservation: Investors who want to protect their capital and preserve their purchasing power may choose investments that are considered to be low-risk, such as cash equivalents, short-term bond funds, or insured deposits.

Income: Investors who want to generate regular income from their investments may choose investments that pay dividends, such as stocks, real estate investment trusts (REITs), or high-yield bond funds.

Growth: Investors who want to grow their wealth over the long term may choose investments that have the potential for capital appreciation, such as stocks, real estate, or growth-oriented mutual funds.

Speculation: Investors who are willing to take on more risk in pursuit of higher returns may choose investments that are considered to be speculative, such as penny stocks, options, or cryptocurrency.

The right type of investment will depend on the individual investor’s goals, risk tolerance, and other factors. It’s important for investors to carefully consider their investment objectives and do their research before making any investment decisions.

Types of mutual funds based on risk appetite

An investor’s risk appetite is their willingness and ability to take on risk in pursuit of potential rewards. Different investors have different risk appetites, and the type of investments that are suitable for one investor may not be suitable for another. Some common types of investments based on risk appetite include:

Low-risk investments: Investors who have a low risk appetite may choose investments that are considered to be safe and secure, such as cash equivalents, short-term bond funds, or insured deposits. These investments may not provide high returns, but they can help protect investors’ capital and provide some income.

Moderate-risk investments: Investors who have a moderate risk appetite may choose investments that have some potential for growth and income, but also come with some level of risk. Examples of moderate-risk investments include diversified mutual funds, blue-chip stocks, and high-quality corporate bonds.

High-risk investments: Investors who have a high risk appetite may choose investments that have the potential for higher returns but also come with a higher level of risk. Examples of high-risk investments include small-cap stocks, emerging market bonds, and real estate investments.

It’s important for investors to understand their own risk appetite and choose investments that align with their goals and risk tolerance. It’s also important to remember that all investments come with some level of risk, and even low-risk investments can lose value.

Types of specialized mutual funds

In addition to the main types of mutual funds based on their investment objectives and strategies, there are also several different types of specialized mutual funds. Some examples of specialized mutual funds include:

Sector funds: Sector funds invest in specific sectors of the economy, such as technology, healthcare, or finance. These funds can provide investors with exposure to specific industries or areas of the market that they may not be able to access through a more diversified fund.

International funds: International funds invest in companies outside of the United States, providing investors with exposure to foreign markets and currencies. These funds can be focused on a specific region, such as Europe or Asia, or they can be more diversified and invest in multiple regions.

ESG funds: ESG (environmental, social, and governance) funds invest in companies that have strong ESG practices, such as reducing their carbon emissions or promoting diversity and inclusion. These funds aim to provide investors with both financial returns and social impact.

Leveraged funds: Leveraged funds use financial leverage, such as borrowing or derivatives, to amplify their returns. These funds can provide investors with higher potential returns, but they also come with higher levels of risk.

Target-date funds: Target-date funds are mutual funds that are designed for investors who are saving for a specific goal, such as retirement. These funds automatically adjust their asset allocation over time to become more conservative as the target date approaches.

Specialized mutual funds can be a useful tool for investors who want to focus on specific areas of the market or who have specific investment goals. However, these funds can also be more complex and come with higher levels of risk, so it’s important for investors to carefully consider their investment objectives and risk tolerance before investing in a specialized mutual fund.