Find the below detailed categorization of the Funds available in the market today.
Go through each fund and choose the best fund on the basis of the answers asked in the previous blog post How to identify best mutual fund for you
Money Market Funds:
The money market consists of safe (risk-free) short-term debt instruments, mostly government Treasury bills.
This is a safe place to park your money. You won’t get substantial returns, but you won’t have to worry about losing your principal.
A typical return is a little more than the amount you would earn in a regular checking or savings account
To provide current income on a steady basis.
These funds invest primarily in government and high-quality corporate debt, holding these bonds until maturity in order to provide interest streams.
The primary objective of these funds is to provide a steady cash flow to investors. As such, the audience for these funds consists of conservative investors and retirees. Because they produce regular income, tax conscious investors may want to avoid these funds.
Bond funds invest and actively trade in various types of bonds.
These mutual funds are likely to pay higher returns than certificates of deposit and money market investments, but bond funds aren’t without risk.
Nearly all bond funds are subject to interest rate risk, which means that if rates go up the value of the fund goes down.
The objective of these funds is to provide a balanced mixture of safety, income and capital appreciation.
The strategy of balanced funds is to invest in a portfolio of both fixed income and equities.
A typical balanced fund will have a weighting of 60% equity and 40% fixed income.
The weighting might also be restricted to a specified maximum or minimum for each asset class, so that if stock values increase much more than bonds, the portfolio manager will automatically rebalance the portfolio back to 60/40.
Funds that invest primarily in stocks represent the largest category of mutual funds.
Generally, the investment objective of this class of funds is long-term capital growth.
There are many different types of equity funds because there are many different types of equities like large cap, mid cap, small cap etc.
An international fund (or foreign fund) invests only in assets located outside your home country. Global funds, meanwhile, can invest anywhere around the world, including within your home country.
It’s tough to classify these funds as either riskier or safer than domestic investments, but they have tended to be more volatile and have unique country and political risks.
On the flip side, they can, as part of a well-balanced portfolio, actually reduce risk by increasing diversification since the returns in foreign countries may be uncorrelated with returns at home.
Index funds are passively managed funds that seek to replicate the performance of a broad market index such as the S&P 500 or Dow Jones Industrial Average (DJIA).
An investor might consider an index fund if they subscribe to the logic that most active portfolio managers cannot beat the market on a regular basis.
Since an index fund merely replicates the market return it also benefits investors in the form of low fees.
Exchange Traded Funds (ETFs):
A twist on the mutual fund is the exchange traded fund, or ETF. These ever more popular investment vehicles pool investments and employ strategies consistent with mutual funds, but they are structured as investment trusts that are traded on stock exchanges, and have the added benefits of the features of stocks.
ETFs can be bought and sold at any point throughout the trading day.
ETFs can also be sold short or purchased on margin.
ETFs also typically carry lower fees than the equivalent mutual fund.
Many ETFs also benefit from active options markets where investors can hedge or leverage their positions.
ETFs also enjoy tax advantages from mutual funds. The popularity of ETFs speaks to their versatility and convenience.
These are targeted strategy funds aimed at specific sectors of the economy such as financial, technology, health, and so on.
Sector funds can therefore be extremely volatile since the stocks in a given sector tend to be highly correlated with each other. There is a greater possibility for large gains, but also a sector may collapse
So each types of funds have its own uniqueness and application, which needs to be decided by the investor before purchasing any fund.