Most Popular Types of Mutual Funds and Everything in Between


Mutual funds are a fantastic way to diversify your portfolio. And these funds come in different sizes and shapes. It’s not surprising that there exist several types of mutual funds.

mutual funds

However, many investors, especially the beginners, only have a vague idea of what mutual funds are exactly like. That’s why we got this list for you.

Along with that, we’re also going to tell you the risks, advantages, and other whatnots of investing in mutual funds.

Let’s first get into a breakdown.

What are Mutual Funds?

Mutual funds are pooled investments managed by professionals. And these funds are becoming more and more in demand nowadays. That’s primarily because a lot of us are more conscious about our retirement plans, savings for college, and other financial goals.

According to statistics, over $4 trillion people have their mutual funds investments—in America alone. That’s a huge number already, and it’s growing daily. Across the globe there are nearly $28 trillion people invested in mutual funds.

Along with the growth in the number of investors and funds, the strategies and types of mutual funds expand.

How Can You Earn from Mutual Funds?

Even though there multiple types of mutual funds, you can money using them in three ways:

·         You can earn from dividends on stocks or interest on bonds. Using distribution, a fund gives you almost all of the income it generates throughout the year. Additionally, you have the option to receive the distribution through paychecks or reinvest the earnings to obtain more shares.

·         Whenever the fund sells some securities that have higher prices, your fund already has capital gains. You could also get these gains through distribution.

·         If the fund chooses not to sell the fund holdings with the increased price, you can sell your mutual fund shares in the market.

The Types of Mutual Funds

Here are the different types of mutual funds that you can choose to invest in:

Equity Funds

Equity funds invest in stocks. The primary goal of this mutual fund is to have growth that’s faster than other types of mutual funds, such as the money market or fixed-income funds.

This means that you might have to suffer higher risks—which mean losing some money. In addition, you also have at hand sub-types of equity funds.

There are those that invest in growth stocks. These funds do not typically pay dividends. There are equity funds that specialize in income funds. Income funds, on the other hand, hold stocks that pay huge dividends. Other types of equity funds invest in value stocks, small-cap stocks, mid-cap stocks, large-cap stocks, or even combination of them.

Read further: Breaking Down Risk Management

Money Market Funds

Money market funds specialize in short-term fixed income securities. And these securities include government bonds, bankers’ acceptances, certificates of deposits, commercial papers, and treasury bills.

If you’re averse to risk, money market funds are the safer option for you. However, you would also have to settle for lower potential return compared with other types of mutual funds.

See also How much Risk Can You Tolerate?

Fixed-income Funds

If you want a fund that targets investments with a fixed rate of return, this is the fund that’s right for you. Fixed-income funds typically aim for government bonds, high-yield corporate bonds, and investment-grade corporate bonds.

The goal is to earn money into the fund on a regular basis. The earnings normally come from the interest.

As you can expect, aiming for high-yielding investments in this fund, like high-yield corporate bonds, requires you to withstand riskier situations. If you don’t like that, you can instead choose investment-grade and government bonds.

Balanced Funds

If you’re into investing in equities but you also want to throw fixed-income securities in the mix, balanced funds are for you.

What these funds do is balancing the goal of earning higher returns and the risk of losing some cash. These funds generally follow a formula in order to split money across different types of investments. Balanced funds normally sport higher risk than pure fixed-income funds. But they are also typically less risky than equity funds.

Nonetheless, these funds can be either aggressive or conservative. Aggressive funds sport more equities than bonds, while conservative funds have more bonds than equities.

Specialty Funds

As the name suggests, these funds invest in specialized industries. Among these industries are commodities, real estates, and social-responsibility investing.

To illustrate, a fund that is “socially responsible” invests in companies supporting environmental campaigns, human rights, and diversity.

It goes without saying that these funds try to avoid companies associated with the military, gambling, weapons, tobacco, alcohol, and other such stuff.

Index Funds

Index funds are perhaps the most popular among the types of mutual funds. These funds’ goal is to follow and track the performance of a specific index like the S&P/TSX Composite Index.

Since it tracks the index, the fund’s value will inadvertently go up when the index goes up. It will go down as the index goes down.

Index funds are usually cheaper than actively managed mutual funds. That’s because the portfolio manager does not do a lot of research. He or she also doesn’t have to come up with investment decisions.

There are two types of management approach you can use in this fund:

·         Active management – your portfolio manager will buy and sell investments. The goal is to beat the return of the overall market and/or another identified benchmark.

·         Passive management – in this approach, the manager will only have to buy a portfolio of securities. And these securities track the performance of a benchmarked index. You only have to adjust the holdings if there are changes in the component of an index.

Funds of Funds

These funds are much like balanced funds, but it sports higher MER than other types of mutual funds. This fund can make your diversification easier, as well as your asset allocation.

A Word of Warning

Before you jump right in and start investing in a mutual fund, make sure you understand the fund’s inner workings.

Wrap your head around the goals of the funds. Check if the goals are in conjunction with your own goals. In addition, determine your risk tolerance. The risks found in different types of mutual funds also vary a lot, so determining how much risk you can take is very crucial if you want to work the fund in your favor.

Digging Deeper into the Types of Mutual Funds

Mutual Fund Schemes

Those are just the overview of each type of mutual funds. Now, we’re about to dig deeper.

If you want to achieve your short-term goals (those goals that fall under five years), then you can try and invest in debt schemes. Of course, you have to choose a debt scheme that will suit your goals and situation perfectly.

Liquid Funds

These funds invest in, as the name suggests, highly liquid money market securities. These are ideally the securities with residual maturity, which should not last over 91 days. You can let your money simmer in them for couple days or a few months.

Ultra-Short-Term Funds

These funds primarily invest in very short-term debt securities. They also invest in some longer-term debt securities. You can let your money stay here for a few months to a year.

Short-Term Funds

These usually invest in debt securities with one to three years of average maturity. You can expect these funds to perform well when the short term interest rates are high. You ought to park your money here for a few years.

Dynamic Bond Funds

Dynamic bond funds invest in a plethora of debt and money market securities, all with different maturities. These funds have a portfolio that’s actively managed which changes along with the interest rate outlook of the fund manager. If you’re the type that likes to pass on the task of calling on interest rates, this is the fund for you.

Income Funds

Income funds pour money in government bonds, money market instruments, and corporate bonds that have long maturities. These funds are very vulnerable to interest rate changes, so they are mainly suitable for investors who have high risk tolerance and who are planning to stay invested for the long haul. A little tip: it’s very ideal to invest in these funds when interest rates are almost certainly going to fall.

Fixed Maturity Funds

Fixed maturity funds are closed-ended debt mutual funds, and they work in a similar manner with fixed deposits. These funds invest in debt instruments with less than or equal maturity date with the scheme. They have to redeem your securities on or before the maturity. Additionally, they have to pay investors before the maturity date.

Gilt Funds

Gilt funds specialize in government securities. You can be free from the most usual risks because the government is the one that issues the bonds. On the flip side, these funds are quite easily shaken when changes in interest rates take place. They are also vulnerable to other economic factors. You should be looking to invest for a long time if you plan to use this fund.

Debt-Oriented Hybrid Funds

As the name clearly tells us, debt-oriented hybrid funds specialize in debt, along with a few equities. In the portfolio, the equity part could provide additional returns, though it also makes it riskier. You got to have an investment horizon of more than three years if you plan to invest in these funds.

Kinds of Equity Funds

As we indicated above, there are other sub-types of equity funds. Here they are:

Arbitrage Funds

Arbitrage funds do not invest in equities. However, they are treated as such or are considered as equity schemes for taxation purposes. How is that so? These funds try to utilize the price difference between the cash and derivatives markets in order to generate returns. Favorable taxes can be used to their advantage because the investments that are held for a year in them can be qualified for long term capital gains tax, which is zero. This could be your best option if you are in the highest tax bracket and you want to let your money simmer for a short time.

Large-cap Funds

As the name suggests, these funds invest in well-established companies with large market capitalization. This is so because large-cap companies are considered the safest companies to invest in. Aside from their large capitalization, these companies are almost always the market moves and market leaders. If you’re conservative when it comes to equity, large-cap funds are good for you. These investments carry less risk, with a decent amount of returns.

Midcap funds

Midcap funds are those funds that invest in medium-sized companies. These are the companies with a middle-level market capitalization. They are also the ones who have probably achieved a part of their full potential. However, they can also be extremely risky since there is always that possibility that they won’t achieve or reach their full potential. On the other hand, if they managed to reach their long-term targets, you stand the chance of being rewarded generously. If you have a high risk tolerance, this one should be good for you.

Small-cap Funds

These funds invest in small companies, and of course that means companies with small market capitalizations. These are extremely risky companies since we know little about them. Not all the details of their business are available in public domain. However, there’s always the chance that they can boom and have a phenomenal run. Your risk appetite should be stellar high if you plan to invest in such companies.

Equity-Oriented Hybrid Funds

These types of funds invest in a combination of equity, which comprise at least 65 percent of the whole portfolio, and debt. Compared with pure equity funds, equity-oriented hybrid funds are less volatile, thus less risky, because of the mixture in the corpus. The debt component can stabilize your portfolio during times of extreme volatility. If you are quite risk averse and conservative, this one’s for you.

Diversified Funds

Diversified funds, as you may guess, invest across all the types of market capitalizations. This primarily depends on the market outlook of the fund manager. Now, since the fund is spread across market caps, you have fewer risks than mid- and small-cap funds, but a little more risks than large cap funds.

Equity-Linked Savings Schemes

 These are also called tax-planning mutual funds. Equity-linked saving schemes are good for you if you are searching for a good way to save taxes. Your investments in these funds can give you some chances of having your taxes reduced. You must remember that they come with a compulsory lock-in period of three years.

Sector Funds

Sector funds specialize in a certain sector, or follow the lines of a defined theme. Investments are focused on one sector or theme, so they can be extremely risky. Timing your entry and exit from them is very, very crucial. Remember that the wealth of different sectors chance along with the different cycles of the economy. You must first gain in-depth knowledge of a particular sector before you can jump in.

Advantage of Investing in Mutual Funds

Different types of mutual funds offer different benefits to different investors. However, you can expect to have the following as the overall advantages of investing in mutual funds:

Professional Management

This is arguably the top advantage of investing in mutual funds. You don’t have to pick stocks and manage them by yourself. You can have a professional investment manager to handle everything with thorough and careful trading.
This benefits investors who have a lot on their hand and who have not the insights and expertise to manage their portfolios. Some investors, on the other hand, merely do not have the intimate knowledge over investments that the fund manager has.
Further, it’s relatively cheap. So even small investors can avail a fund manager from a mutual fund to oversee and manage their investments.

Economies of Scale

Mutual funds buy and sell tremendous amounts of securities and funds. Because of this, transaction fees are lower than if you would pay for them. Also, mutual funds pool money from many modest investors. This enables them to invest in specific assets or take huger positions than what you can afford.


If you own shares in a mutual fund instead of owning stocks and bonds, you can spread out your risk across the various holdings. This effectively does the diversification job for you. You can spread the investments across a large number of a plethora of assets, so your eggs are not all in one basket. Diversification works because the losses in some of the assets you own can be minimized by the gains other assets you hold.


Buying a mutual fund is very easy and direct. In addition to this, many brokerages and banks have their own mutual funds, plus the minimum investment cost is pretty cheap. Many other companies also have automated and systematic plans where you can invest a predetermined amount of money on a monthly basis.


As time goes by, more and more types of mutual funds engage in more and more asset classes and strategies. This enables you to be exposed not only to stocks and bonds but also other mandates like commodities, real estate, and foreign assets via specialized mutual funds. In fact, other mutual funds are calibrated to let you profit even in a bear or falling market. Those are called bear funds. If you’re an ordinary investor without investments in mutual funds, you may not have the opportunities for other foreign and local investments.


If you’re concerned about the safety of your investments, mutual funds may just be the perfect fund for you. Mutual funds are under the eyes of industry regulators, which ensure the accountability and fairness given to investors.

Disadvantages of Investing in Mutual Funds

Just a mutual funds have its benefits, it also sport some inherent risk and disadvantages. Here they are:

Active Management

As we have mentioned, professional fund managers will handle your investments. Now, some investors don’t think that these fund managers are any better than individual investors when it comes to picking stocks. No matter how expert the manager is, there’s always the big chance that his/her decisions will fail. Of course, this manager can still get paid even if his/her strategy didn’t work. Actively managed funds are also subject to fees, though the passive management principle is gaining huge popularity nowadays.
advantages and disadvantages of mutual funds

Costs and Fees

You will have to prepare some amount of cash to pay for the fees for creating, distributing, and running mutual funds. In a way, you will have to shoulder the expenses for the portfolio manager’s salary to your quarterly statements. Fees and charges vary in different types of mutual funds, so if you fail to pay attention to this detail, it could derail your budget plan and capital allocation. And even if you think that these fees pale in comparison to the gains you could acquire, they can add up and accumulate year by year.


If you want to liquidate or convert your funds into cash, the mutual fund will allow you to do so. However, unlike stocks that trade throughout the day, a huge number of mutual fund redemptions only happens at the end of each trading day.


Whenever a fund manager decides to sell a security, the capital gains tax will get triggered. If you are conscious of those taxes, you must keep this simple detail in mind when investing in mutual funds. You can alleviate this by investing in funds that are tax-sensitive, or you can hold non-tax sensitive mutual fund via a tax-deffered account.


Although diversification is the golden rule for many investors, over-diversification can also cause some losses. Mutual funds can have small holdings in a variety of companies. Because of this, even if you have high returns from some investments, those returns won’t really make much difference on your overall return. If a successful fund grows too enormous, dilution can also happen.

Cash Drag

 Most of mutual funds need to hold a substantial amount of their portfolio in cash for them to satisfy share redemptions each day. To maintain liquidity and the ability to serve withdrawals, mutual funds will have to keep a bigger proportion of their portfolio at cash.


Summing up, we know that mutual funds are very ideal for several types of investors. Whatever kind fo investors you are, there will always be type of mutual fund that will suit you. These types of mutual funds offer varying benefits and risks, so must dig deeper into each of them. Also, keep in mind that mutual funds in general also sport inherent risks and disadvantages.

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