Mutual funds are the most common type of investment available today. They are the anchors of most investment portfolios. Whether you have a 401(k) or an IRA; you probably have some type of mutual fund in their retirement plan. A mutual fund is a professionally managed investment that pools money from a bunch of different investors. Mutual funds are attractive because they provide investors with an easy way to build a diversified portfolio. The most common type of mutual fund is an equity mutual fund. Equity funds are the largest class of mutual funds.
Let’s take a look at the different types of equity mutual funds that are available.
- Large Cap, Mid Cap, Small Cap Funds
Equity funds are funds that invest primarily in stocks. These funds have the primary goal of capital appreciation. They invest the largest percentage of their money in the common stock of companies. Funds can invest in large cap, mid cap, and small cap stock funds. Large cap funds invest primarily in stocks with market capitalizations larger than $10 billion dollars. Mid cap funds invest in stocks with market capitalizations between $1 billion and $10 billion dollars. Small cap funds invest in stocks with market capitalizations that are less than $1 billion dollars.
- Value, Blend, Growth Funds
Mutual funds are also divided into three categories. Your strategy could be to invest into value, blend or growth funds. Value funds are funds that invest in stocks that are currently out of favor or distressed. These stocks typically have low P/E ratios and may be trading near their 52 week lows. They are shunned by investors and may be selling for lower than their true value. Growth funds invest in companies with higher P/E ratios that are increasing earnings at faster levels than competitors. These stocks are high flyers that are market favorites. Blended funds take a combo approach. They invest in growth stocks and value stocks.
- Sector Funds
Another option available to equity investors are sector funds. Sector funds focus on stocks and specific industries. For example, investors interested in the oil sector can invest in an energy fund. Investors that want access to bank stocks can invest in financial sector funds. This saves investors from having to try and pick an individual stock in a sector. A sector fund takes the guesswork out of having to pick the winner from a particular sector.
- International Funds
If you are looking for exposure to foreign markets then an international fund may be the right choice for you. You can invest in the ever popular BRIC nations (Brazil, Russia, India, China). Global funds invest in companies all around the world. Many foreign investments have much higher growth rates than domestic companies. These funds tend to be a lot riskier but offer a lot more upside.