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Nevertheless, it is important to important to understand the risk and rewards of each mutual fund before investing. Generally, mutual funds that have higher risks will offer higher potential return. Vice versa, less risky mutual funds usually offer less potential return. However, all mutual funds involve some level of risk. There are no mutual funds that are free of all risks.
Mutual funds can usually be classified into three categories:
Money Market Funds: These types of funds are safe place to park your money. Although the returns are usually not that great, it still double a regular saving/checking account. Furthermore, investor won’t have to concern about losing the principal.
Bond/ Income Funds: Bond funds denote funds that invest mainly in corporate and government debt. Although bond funds may appreciate in value overtime, the primary goal of bond funds is to provide a steady income to the investors. Therefore, bond funds are often used to produce retirement income. Bond funds usually pay more than most of the money market funds, but they also carry more risks. Most of the bond funds are subject to interest rate risk, and they can vary dramatically. Some of the major types of bonds are: U.S. Government Bond funds, Corporate Bond Funds, Municipal Bond funds, and Mortgage Back Securities Funds.
Equity funds: Sometimes they are also known as “ Stock Funds ”. Equity funds are the largest and the riskiest type of mutual funds. The primary objective of Equity funds is to grow your money, because they usually give the highest reward.
Apart from these, other categories of mutual funds include index funds, international funds, global funds, small cap funds, large cap funds, middle cap funds and value funds. All these funds differ from each other in their investment pattern and the amount of risk they carry.
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