Types of Mutual Fund
There are five primary categories of mutual funds, organized by their investment objectives and strategies.
Main Categories
- Equity Fund — invests primarily in stocks, seeking long-term growth and typically carrying higher risk, as seen in the Fidelity 500 Index Fund, which tracks the S&P 500.
- Fixed Income Fund — invests in bonds and other debt securities, aiming for regular income and relatively lower risk, exemplified by the Vanguard Total Bond Market Index Fund, which holds a broad portfolio of US bonds.
- Money Market Fund — focuses on low-risk, short-term debt instruments, providing liquidity and preserving capital, such as the JPMorgan Prime Money Market Fund, which invests in commercial paper and treasury bills.
- Hybrid Fund — combines different asset classes, like stocks and bonds, to balance risk and return, as illustrated by the Vanguard Balanced Index Fund, which allocates 60% to stocks and 40% to bonds.
- Sector Fund — concentrates on a specific industry or sector, such as technology or healthcare, seeking to capitalize on growth opportunities, like the T. Rowe Price Science and Technology Fund, which invests in companies involved in science and technology.
Comparison Table
| Category | Risk Level | Typical Investment Horizon | Average Annual Return |
|---|---|---|---|
| Equity Fund | High | Long-term (5+ years) | 8-12% (S&P 500 historical average) |
| Fixed Income Fund | Medium | Medium-term (3-5 years) | 4-7% (US bond market historical average) |
| Money Market Fund | Low | Short-term (less than 1 year) | 2-4% (commercial paper and treasury bill yields) |
| Hybrid Fund | Medium | Medium-term (3-5 years) | 6-10% (balanced portfolio historical average) |
| Sector Fund | High | Long-term (5+ years) | 10-15% (sector-specific historical averages) |
How They Relate
The categories can overlap, as Equity Funds may hold a portion of their portfolio in Fixed Income securities to manage risk, while Hybrid Funds blend elements of both Equity and Fixed Income strategies. Sector Funds are a type of Equity Fund but focus on specific industries, and Money Market Funds often serve as a low-risk component in Hybrid Funds or as a cash management tool for investors. Specific pairs, such as Equity Funds and Sector Funds, are commonly confused due to their shared focus on stock investments, but Sector Funds are distinguished by their concentrated sector exposure.