Once we have reviewed the fund classes, we are ready to discuss more specific fund types.
Funds are generally distinguished from each other by their investment objectives and types of securities they invest in.
Broad Fund Types by Nature of Investments
Mutual funds may invest in equities, bonds or other fixed income securities, or short-term money market securities.
So we have Equity, Bonds and Money Market Funds. All of them invest in financial assets. But there are funds that invest in physical assets. For example, we may have Gold or other Precious Metal Funds, or Real Estate Funds.
b. Broad Fund Types by Investment Objective
Investors and hence the mutual funds pursue different objectives while investing. Thus, Growth Funds invest for medium to long term capital appreciation. Income Funds invest to generate regular income, and less for capital appreciation. Value Funds invest in equities that are considered under-valued today, whose value will be unlocked in the future.
c. Broad Fund Types by Risk Profile
The nature of a fund’s portfolio and its investment objective imply different levels of risk undertaken. Funds are therefore often grouped in order of risk. Thus, Equity Funds have a greater risk of capital loss than a Debt Fund that seeks to protect the capital while looking for income. Money Market Funds are exposed to less (volatility) risk than even the Bond Funds, since they invest in short-term fixed income securities, as compared to longer-term portfolios of Bond Funds. However, it surely takes some guts to put money required 30 years later in a bond investment…..
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