What are typical returns one would expect from different types of mutual funds

Article Written By: jimknight

A mutual fund is an investment vehicle which allows an individual to be mostly diversified in his investments by owning a vast amount of stocks or a particular investment tool. The funds invested in a particular scheme are managed by a single fund manager or a team of managers. They make sure that the fund grows optimally within its investment criteria. These managers are responsible for buying and selling of securities, which is based on their research results. Mutual fund companies pool money from some investors. Each of those investors becomes a shareholder in that fund.

There are literally hundreds of thousands of mutual funds available in the market, although only few of them are considered worthwhile by the majority of investors due to its risk return trade off.

Like every other financial instrument, in mutual funds too the potential return rises with an increase in risk. Low risk is combined with potentially low returns, whereas high risk is combined with high potential returns. According to the mutual fund risk-return trade off, the money invested can only render higher profits if it is subject to the chance of eroding. Accordingly, it is really awkward to quantify returns in exact numbers since that is dependant on market conditions.

The most basal types of mutual funds which are present in the market are as follows, arranged in the order of increasing risk, and consequently, increasing returns:

1.Money market funds – This fund carries a really low amount of risk compared to others. They are considered short term high quality investment tool. This typical fund makes investments only in U.S. companies and the different levels of government. Investor losses are quite rare in this category of fund, although they have happened in the past. This is more or less the type of fund for risk averse investors.

2.Bond funds, or fixed income funds - This specific fund hold higher risk-return trade off compared to money market funds. These types of mutual funds are not limited to a certain type of investment. Here, return can vary due to different types of risks. Such risks associate: credit risk because certain parties may not pay the bills on time, interest rate risks due to fall in the value of these bonds when the interest rate goes up and prepayment risks because the bond issuer may decide to pay off debt to issue new bonds when there is a fall in the interest rates.

3.Balanced funds – This specific fund invests in different kind of asset classes such as vanilla bonds, common and preferred stocks, and short-term bonds etc. This specific instrument avoids too much risk and gives the investor the opportunity to gain consistent income and capital appreciation. Investors who have a aim to earn higher returns but are able to take limited amount of risks are able to get both income and development from this fund. These investments tend to control the crisis of the stock market better due to there portfolio balancing aspects.

4.Global equity growth funds - The value of this category of fund can rise and fall really quickly over a short duration of time. However, they do tend to achieve superior over the long-term. This fund is for investors who want to earn higher returns and are willing to take big risks in order to get it. Over a long duration of time the risk becomes almost nil which enables the investor to make colossal profits.

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