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A mutual fund is an investment vehicle made up of a pool of funds collected
from many investors for the purpose of investing in securities such as
stocks, bonds, money market instruments and similar assets. Mutual funds
are operated by money managers, who invest the fund's capital and
attempt to produce capital gains and income for the fund's investors. A
mutual fund's portfolio is structured and maintained to match the
investment.No matter what type of investor you are, there is bound to be
a mutual fund that fits your taste.It's important to understand that
each mutual fund has different risk and reward profiles. In general, the
higher the potential return, the higher the risk of potential loss.
Although some funds are less risky than others, all funds have some
level of risk – it's never possible to diversify away all risk – even
with so-called money market funds. This is a fact for all investments.
Each mutual fund has a predetermined investment objective that tailors
the fund's assets, regions of investments and investment strategies.At
the most basic level, there are three flavors of mutual funds: those
that invest in stocks (equity funds), those that invest in bonds
(fixed-income funds), those that invest in both stocks and bonds
(balanced funds), and those that seek the risk-free rate (money market
funds). Most mutual funds are variations on the theme of these three
asset classes.Let's go over some of the many different flavors of funds.
We'll start with the safest and then work through to the more risky.
average certificate of deposit (CD). While money market funds invest in
ultra-safe assets, during the 2008 financial crisis, some money market
funds did experience losses after the share price of these funds,
typically pegged at $1, fell below that level and broke the buck. Income
funds are named for their purpose: 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. While fund holdings may appreciate in
value, 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.