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4 Different Types of Mutual Funds To Help You Diversify Your Portfolio And Build Wealth.

We are excited to feature this guest post by Linda Richardson, a New Jersey-based financial content writer. Linda walks you through the different types of mutual funds that investors use to diversify their portfolios and build wealth. 

Mutual funds are a tremendous investment vehicle by which investors can build steady wealth. There are many types of mutual funds to choose from! So, it's important to look at each one, its holdings and objectives. Also, investors should check out the potential for capital gains or loss. There are 4 major types of mutual funds, including equity funds, bond funds, money market funds, and balanced funds. Let's have a detailed picture below!

Equity funds

An equity fund is a mutual fund that invests mainly in stocks. That's why it's also known as a stock fund.  It's the most volatile of the three mutual funds in the market. But if you look at past records, you can see that in the long term stocks have somehow performed better than other types of investments. Usually, stocks fluctuate due to investors' assessment of economic conditions and their impact on corporate earnings. Younger investors should include more equity funds in their portfolios at the expense of bond funds because they have more time to recover from the inevitable stock market headwinds or storms

Depending on the goals of the fund, equity mutual funds can be of three types:

  • Large-cap fund: Companies with a market value of $10 billion or more;
  • Mid-cap fund: Companies worth $2 billion to $10 million;
  • Small-cap fund: Companies worth $300 million to $2 billion .

Bond funds

You might have heard about this type of fund. It's the most common type of fixed-income mutual funds. This type of fund allows you to get a fixed amount back on your investment! They invest in government and corporate debt. You may consider it as a comparatively safer investment than stocks. But bond funds have less potential for growth than equity funds. Financial advisors encourage older investors who are close to retirement to consider incorporating more bond funds in their portfolios. This can help you to nurture your retirement nest-egg, as bond funds help you to earn more interest than putting your dollars in a bank savings account! 

Money market funds

Do you want to invest in a fixed-income mutual fund? Then money market mutual funds can be an option for you! Money market mutual funds invest in high-quality, short-term debt from governments, banks or corporations. By law, these funds can invest in only certain high-quality, short-term investments issued by the US Government, US Corporations, state and local governments. These funds try to keep their Net Asset Value (NAV) at a constant $1 per share. But if the fund's investments perform poorly, the NAV may fall below $1. So, if you want a safer bet in investment, you can certainly invest in money market mutual funds.

Balanced funds

This type of fund is a combination of equity and fixed-income funds. It has a fixed ratio of investments like 60% stocks and 40% bonds. Therefore, balanced funds are also called as hybrid funds.The biggest advantage is that the fund manager has the opportunity to select from a larger selection of assets. If you are a conservative investor who likes a bit of convenience, balanced funds are for you! 

​The bottom line

I hope you aim to have a financially secure future ahead! Investing in mutual funds allows you accomplish just that. Although you do not need a lot of money to start investing and building wealth, it helps to invest as much or as little as possible and dedicate periodic amount from your paycheck regularly or each month. Since having debt can reduce the amount of money you need for investing, it is important to reduce or stay out of debt. If you do succumb to credit card debt, genuine credit card debt relief options may help you get rid of your debts. Start investing in mutual funds to plan for a brighter future!

Please share this article. If you are interested in submitting a guest post, please click here. Here are a few other articles you may find useful: 3 simple ways to handle stock market volatility | 4 smart ways to both invest and pay down student debt | A simple portfolio to supercharge your returns | How to invest $50.

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