Fund Classifications

When I first got started in investing, I heard somewhere that there were about 10,000 mutual funds but I didn't really believe it until I started researching them. That's when I realized that whoever told me that was correct.

Mutual funds are a lot like humans: there's a lot of them and no two are alike. Each has its own unique size, shape, color, and preferences. To any new investor, it can prove to be a daunting task to find the one fund that is best for them. It's this very reason that we've decided to demystify some of the different fund classifications.Stock FundsStock funds are probably the most common funds out there. These mutual funds invest a majority of their assets into common stocks. The fund might have a specific group of stocks that they look for (i.e. small-cap, mid-cap, or large-cap). These funds are typically best for moderate investors with a mid to long-term outlook.

Bond FundsThese are another popular type of mutual fund that invests in bonds. Rather than owning parts of many different companies, they invest in the debts of companies or the government and earn an interest that is paid out to the investors. These types of funds are good for conservative investors with a shorter time horizon.Balanced FundsA balanced fund is a combination of a stock fund and a bond fund. In order to reduce risk, the fund diversifies itself by buying a number of different stocks and bonds. This keeps the fund from dropping considerably in a down market. Unfortunately, it also doesn't appreciate as quickly in an up market. These funds are best for conservative or moderate investors with any time horizon.International FundsThe US is just one of the many markets in the world. In order to open up the international markets to the average investor, international funds were created. By investing in an international fund, you can invest in stocks or bonds from other countries. Many small countries may be growing quickly and an investment in them could prove profitable but there are a number of added risks such as currency fluctuations and political turmoil. These funds are best for moderately aggressive investors with long time horizons.Sector FundsAs their name suggests, sector funds invest in one specific sector of the market. For example, communications funds would invest in telecommunications and information companies. Investing in sector funds allows you to target one specific sector in order to maximize your return. But keep in mind that the risks are greater when you do this. These funds are best for aggressive investors.Green and Quant FundsTwo less-popular types of funds are green and quant funds. Green funds are funds that invest in companies that are working to improve the world rather than those that are harming it. Quant funds are funds that rely heavily on mathematics to determine what stocks to buy. Historically, neither have performed extraordinarily but they might be a good way to diversify your portfolio. They're best for moderate investors.Now that you have a little understanding of the different classifications, it might be easier for you to decide which fund to invest in. If you're still a little unsure, feel free to drop us a line.