Types of Investment Mutual Funds
Mutual funds are popular investment vehicles that offer investors access to diversified portfolios and professional management. With over 7,500 different funds available, they can be classified in many different ways. The Investment Company Institute divides the universe of mutual funds into several broad types when it reports on mutual fund industry trends.
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Stock Funds
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Stock funds, sometimes called equity funds, are the largest class of mutual funds. In October 2010, the Investment Company Institute counted about 4,500 stock funds. These funds invest in the stock markets, buying shares of companies that meet the individual mutual fund investment objectives. Stock mutual funds can include U.S. company stock and/or foreign stocks. Equity funds can be subdivided into groups including large cap and small cap funds, growth or value funds and actively managed or index funds.
Taxable Bond Funds
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Taxable bond mutual funds have portfolios of debt securities and pay out the interest earned from the bonds to investors. Taxable bond fund categories include government bond funds, corporate bond funds, high yield (junk bond) and foreign bond funds. Bond funds are further broken down by the length of maturity of the bonds a specific fund owns. Income funds that are maturity specific have portfolios and names that reflect the investment objectives, such as short term or intermediate term bond funds.
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Hybrid Funds
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Hybrid mutual funds have portfolios that include both stock and bond investments. These funds were traditionally called balanced funds, but newer funds of this type are known as asset allocation funds. Asset allocation funds vary the percentage of stocks and bonds in a fund based on models that predict what class will give the better performance. Lifestyle or target retirement funds are also hybrid funds. These funds balance stocks, bonds and cash to provide an optimum asset mix as an investor saves for retirement.
Municipal Bond Funds
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Tax-free or municipal bond mutual funds hold bonds issued by state and local governments. The interest paid by these bonds and the mutual funds that own them is exempt from federal income tax. The yields on municipal bond funds is usually lower than taxable funds, but the after-tax yield can be higher for investors in higher income tax brackets. State specific municipal bond funds own bonds from a single state providing double tax-free income for residents of the state.
Money Market Mutual Funds
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Money market mutual funds own short-term debt securities, such as commercial paper and Treasury bills. These funds keep investor principal stable with a steady $1.00 share price and pay interest based on short-term market rates. Money market funds come in both taxable and tax free types.
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