There are more mutual funds that there are stocks on the NY stock exchange. To make sense of the variety here are some of the most common fund types.
• Money market funds. These are funds that invest in very short term, liquid securities that offer a safe place to put cash. They offer a very low rate of return but try to maintain a net asset value of $1 per share.
• Bond funds invest primarily in fixed income securities. These could be government bonds, corporate bonds, municipal bonds, convertible bonds or mortgage backed securities.
• Stock funds (equity funds) invest primarily in stocks. They are subdivided into many categories according the size of the companies they invest in (large cap, small cap), the investment style (growth, value) and geography (US, Foreign).
• Balanced funds combine the features of stock and bond funds.
• Specialty funds may invest in certain industries (technology, drugs), countries (Britain, Korea) or real estate (REITs).
Well balanced portfolios frequently include funds from many of these categories in proportions appropriate to the risk tolerance of the investor.