A mutual fund’s power comes from pooling together individual investors to take advantage of the power of total diversification.  Mutual funds can be a good option for an individual who does not have the time to actively manage his or her portfolio.  Instead, the monies are maintained by the mutual fund manager, who is responsible for purchasing stocks, bonds, and other securities from the money that is collected. The types of securities that are purchased are known as the mutual fund’s portfolio.

A mutual fund is an easy way to invest money.  Most types of mutual funds will request a minimum investment of $1,000. With a mutual fund one can redeem, or buy back shares, at any time.  It is this liquidity that allows a mutual fund holder to receive the money they need, but leaving a mutual fund early can cost you in penalties and financial fees.

Understanding the types of mutual funds

Before choosing just one mutual fund, it is important to know the types of mutual funds including:

1. Money Market Mutual Fund- This type of mutual fund is the safest in preserving the principal by investing in short-term, high-quality securities.  A money market mutual fund’s goal is to provide the investor with a regular distribution of a set amount of income, pre-determined by interest rates. A money market fund is also used to hold cash during high market volatility.

2. Income Mutual Fund (Bond Fund) - This type of mutual fund is typically invested in government, corporate, or municipal debt securities. A debt security is a type of investment that pays interest on a regular basis.  This is a great type of mutual fund for someone that desires periodic payments of income. The risks of investing in these funds is dependent on prevailing interest rates, the maturity of the instrument of debt, and the credit quality of the issuer of the debt.

3. Balanced Mutual Fund- A balanced mutual fund is great for both income and growth.  This is a fund that is invested in both debt securities and equity. A balanced mutual fund provides the investor with income generated from the debt securities of the portfolio, and the long-term growth is a component to equity.

4. High-Yield Income Mutual Fund- This type of mutual fund is designed to achieve a high amount of income by investing in below investment grade bonds or debt securities. There is a high level of risk with this type of mutual fund. An investor interested in investing in high income funds should be prepared to incur the loss of principal.

5. Growth Mutual Fund- This type of mutual fund is primarily invested in the stock of already established businesses. A growth mutual fund is designed to provide the investor with long-term capital gains, but not a regular income

6. Aggressive Growth Mutual Fund- This type of mutual fund is invested in common stock for a long-period of significant capital gains. An aggressive growth mutual fund is usually invested in small companies, new industries, or out-of-favor companies. There is a higher risk with this type of mutual fund.

7. Index Mutual Fund or Exchange Traded Funds (EFTs) - This type of fund invests in a basket of stocks that track certain stock market and commodity indices. Index funds can be an aggressive or conservative investment depending upon the volatility of the index it imitates

Mutual funds can be a great option for an investor who does not want to manage his or her portfolio independently.  However, given the mutual fund scams that have plagued the industry in the last decade, an investor who has the time and ability to monitor personal investments should consider other diversified options, such as broker managed portfolios and hedge funds.  Nonetheless, if you select a reputable mutual fund family , it can provide you with a steady stream of income and long-term growth in principal.