There are tons of different mutual funds out there. It can be very confusing trying to figure out what separates one fund from another. There are a variety of different types of mutual funds to choose from. Let’s take a look at different types of mutual funds.
You have growth funds whose sole focus is to invest in stocks that have the grow at rates that are faster than industry averages. These funds are often called Capital Appreciation funds. They may invest in small, mid or even large cap growth companies. Dave Ramsey recommends growth stock funds for his investors.
There are also value funds which typically invest in specific stocks that are out of favor. They can be in sectors that are currently performing poorly or just be companies that are lagging the performance of competitors. Value funds buy undervalued securities that have been sold off by the market.
Blended funds are a hybrid mixture of growth and value stocks in one convenient portfolio. These funds try to take the best aspects of growth and value investments to achieve a return for investors. They try to achieve a balance in the equity portion of a portfolio.
Sector funds are funds that invests solely in businesses that operate in one particular industry. The are energy sector funds, financial sector funds, metal funds, retail sector funds, technology sector funds, healthcare sector funds, agricultural sector funds, natural resource funds, and so on. There are funds available for every single sector of the economy. These funds are not for the sake of diversification. They are designed for investors looking to profit off of one particular industry.
International funds provide exposure to investors looking to invest in foreign markets. There are diversified international funds that invest in a large variety of foreign countries. There are focused international funds that only invest in a limited number of countries like Brazil, Russia, India, and China (BRIC). Fund companies also sell international funds that are country specific.
Index funds seek to replicate the total return of a specific index like the Dow Jones or the S&P 500 index. Index funds work well for passive investors as they are known for their low fees and low turnover. There are index funds available that track every market index.
The mission of bond funds is to provide consistent current income. Bond funds are loved by fixed income investors that are looking for a steady stream of dividend payments. These funds typically invest in either corporate securities which pay higher interest rates or government bonds which pay lower guaranteed rates.
Balanced funds are great for beginners investing as they are the easiest way to get one step diversification. Balanced funds try to find the right “balance” between capital appreciation and income. Investors get the best of both worlds in that they get growth and dividend income. Balanced funds are not always a 50%-50% split as you would expect. They are typically a 60%-40% split. They consistently rebalance so that the percentages remain inline.