In this post, we’ll be giving a rough outline of the different categories of mutual funds and the approximate risk inherent with each. There are thousands of mutual funds with almost countless sub-categories. But to keep it simple, we’ll discuss just some of the main categories. We are going to start with the higher risk categories and work my way down to lower risk options.
Aggressive growth funds
The highest risk is experienced with aggressive growth funds. These funds attempt to achieve the highest capital gains in exchange for high risk. Investments held in these funds are in companies that demonstrate high growth potential, usually with a lot of share-price volatility.
Next are growth funds, which are designed to provide capital appreciation by investing in stocks with growth potential. Their goal is to provide gains over the long term, usually with less risk than their aggressive fund counterparts.
Growth and income funds
Next in line are growth and income funds. They are designed to pursue long-term growth, as well as provide regular dividend income. These funds invest mainly in stocks with a history of capital appreciation and consistent dividend payments.
Following growth and income funds are balanced funds. They usually invest in stocks and bonds in an effort to obtain the highest return, consistent with a lower risk strategy. The relative balance of these securities can be changed to take advantage of phases in economic cycles.
Next are bond funds. Up to this point, all the funds we’ve discussed held some or all of their investments in stocks. As the name suggests, bond funds hold only bonds. There are all types of bond funds, from high to low risk, and from short to long-term.
Money market funds
Last on the risk scale, are money market funds. These funds invest only in cash or cash equivalents. They aren’t guaranteed but have a very solid track record for safety. The reason people invest here rather than in a savings account, is that money market funds not only usually pay more interest than regular savings accounts, but as interest rates rise in the general market, money market returns also rise.
As always, you’re going to want to do your homework and consult a financial expert before making any investment.