Understanding the different types of mutual funds

Like ice cream, mutual funds come in many different flavors. Together, you and your financial professional can find the combinations, quantities and types of mutual fund shares that are right for you based on your circumstances and objectives. Here’s an overview of some of the types of mutual funds we offer.

Equity mutual funds

Equity mutual funds invest primarily in stocks. This includes common stock, preferred stock, securities that can be converted into common stock and securities (or other investments) with prices linked to the value of common stock. Equity funds are often defined by the size and style of the companies in which they invest. Large-cap, mid-cap and small-cap funds invest in companies with a specific size referred to as market capitalization. International funds invest in companies headquartered outside the United States.

What is market capitalization?

Market capitalization is the calculation of the total market value of all of a company’s outstanding shares multiplied by the price of one share. In the early 1980s, companies with market caps of more than $1 billion were considered large caps. What was once labeled big is considered small by today’s standards. While definitions vary between sources and over time, the financial community currently recognizes the market cap categories listed below.

Market capitalization guide

Types of equity mutual funds

• Growth funds invest in growth stocks and seek capital appreciation. They’re generally considered riskier than other types of mutual funds but may provide potentially higher returns.
• Value funds invest in securities that are determined to be fundamentally undervalued and are generally considered less risky than other mutual funds. These funds focus on securities that provide income rather than on the capital appreciation of the stock.
• International funds invest in countries outside of the U.S.
• Global funds invest in the U.S. and countries outside of the U.S.
• Emerging markets funds invest primarily in low- or middle-income countries, which are in the transitional phase between developing and developed. Emerging market countries are generally in regions such as Asia, Latin America, Eastern Europe, the Middle East and Africa.

Sector funds

Sector funds primarily invest in the securities of one industry or sector. Examples of sector funds include technology and science funds, health care funds and energy funds.

Fixed-income funds

Fixed-income funds invest in securities, including bonds and other debt securities, which represent an obligation by an issuer to pay a specified interest rate or dividend at specific times.

How do bonds work?

A bond investor loans money to a bond issuer who borrows it for a defined time period, at a fixed rate of interest. The issuer promises to repay the investor all principal, plus interest payments. 

Bonds are issued by corporations, municipalities, states and U.S. and foreign governments, to finance projects and activities. The bond investor earns a return on the investment through fixed interest payments and any bond price increases during the holding period. 

Bond prices are influenced by market conditions, including changes in interest rates. Typically, when interest rates rise, bond prices fall. And when interest rates fall, bond prices rise. Overall, bonds are considered to be less risky than stocks and in most cases, provide a lower return.

Types of fixed-income funds

• U.S. Treasury bond funds invest in U.S. Government bonds and notes that will mature in more than three years.
• Municipal bond funds invest in bonds issued by states, cities and counties. The interest earned on municipal bonds is not taxed by the federal government.
• Corporate bond funds invest in bonds with higher credit ratings issued by corporations.
• High-yield bond funds invest in corporate bonds with lower credit ratings and greater risk of default.
• Mortgage funds invest in mortgage-backed securities.
• Foreign bond funds invest in bonds issued by companies and governments of various countries. (Global funds include U.S. bonds, but international funds do not include U.S. bonds.)

Index funds

Index funds are constructed to match or track the performance of a market index, such as the S&P 500® Index. (The name of the market index is sometimes included in the fund’s name.) These funds can be less expensive than actively managed funds. They do not attempt to beat the performance of the market index they track.

Asset allocation funds

Asset allocation funds let you invest in one fund that provides diversification across a number of asset classes, including stocks, bonds and money market securities. This strategy seeks to maximize returns while minimizing risks.

Alternative funds

Alternative funds do not invest in stocks, bonds and cash. Alternative investments include hedge funds, managed futures, real estate, commodities and derivatives contracts. The returns of alternative investments generally have a low correlation to more standard asset classes.

Learn more about the types of mutual funds Nationwide offers.

Investing in mutual funds involves risk, including the possible loss of principal, and there’s no assurance that the investment objective of any mutual fund will be achieved. Keep in mind that individuals cannot invest directly in a market index.

Source: Based on information from Investopedia.com