by Erich Rosenberger M.D.

Created on: January 12, 2009

There are a wide range of different mutual funds on the market today. Knowing in the nuances of each different type can be quite intimidating. Each type of mutual fund has certain advantages and disadvantages. Mutual funds may seem to be a safer investment compared to buying regular stock, however, you can still loose money when investing in them. The different types of mutual funds are often categorized by the amount of risk they carry.

As a general rule, mutual funds fall into six categories. Be aware that many mutual funds allow some crossover in the types of investments they are allowed to make. As such, you should always do detailed research about what specific investments are made by a fund before investing your money in it.

Equity mutual funds invest in shares of common stock. These are companies that may be large and well known, such as Google, Ford, or Microsoft, or they may be smaller companies that are very "sector specific". Regardless, these types of funds investing in stock issued by companies.

Equity funds can be further divided into four more categories. Growth and income mutual funds, international mutual funds, growth mutual funds, and aggressive growth funds. Each type is different choosing which one to invest in depends on what you are looking to accomplish. Some people do not like taking any risk at all - others will risk a lot.

Balanced mutual funds give an investor the ability to put their money in a fund that owns both stocks and bonds. These are sort of a "hybrid" between the first two categories. They own some corporate stocks, and some bonds.

Money market mutual funds are often considered the safest and offer stability for the principal, in addition to having a high degree of liquidity if you want to sell them. You won't make much with these funds, but your money is relatively very safe from loss.

Fixed income mutual funds allow an investor to put their money government and corporate securities. These offer a fixed rate of return on the investment. These mutual funds are not as risky as equity funds, but over the long term, they are less likely to make you a lot of money. They are generally used by older folks, and people who are retired and want a steady, monthly income with less risk.

Bond mutual funds invest in both tax free and taxable bonds. Bond funds are generally not considered to be very risky, but they can loose money, especially if interest rates rise. If the interest rates increases, the value of the mutual fund decreases. This may seem unusual, but it happens because of the need to sell bonds at a lower price to buy new ones with a higher interest rate. Bond funds pay out some interest every year, making them attractive to people who need long-term income. A bond is a loan from either a company or the government.

Sector/Specialty mutual funds are used for diversity. These are funds that invest in very specific areas of the economy. There are funds that invest in health care companies, real estate, software companies, and even things like precious metal mining companies. You name it, there's a sector specific fund that covers it.

There are many options with mutual funds. New investors sometimes get confused. If you find yourself overwhelmed by the number of investment choices available to you, take a deep breath and stop for a while. Take a look around trusted sites on the internet (such as Morningstar.com) and do some research before investing. There is no limit to the information that can be obtained from the internet - and some of it can even be reliable!

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