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Types of mutual funds

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For virtually every investing goal and every appetite for risk there is an appropriate type of mutual fund. While every fund involves some level of risk, that risk varies based on the type of fund in which you invest. Understanding the risks involved with investing and your own tolerance for risk—as well as your desire to involve yourself in the management of your investments—is key to helping you choose the fund or funds that best meet your investing needs.

Money market funds invest in highly liquid, short-term securities, such as Treasury bills and certificates of deposit. These are considered to be some of the lowest-risk funds available.

Bond funds are professionally managed portfolios that invest in numerous individual bonds. Each fund has a stated objective, generally focusing on a particular sector, such as corporate or Treasury bonds, or broad category, such as investment grade or high yield. Funds can also be managed to a specific time horizon, investing only in short, intermediate, or long-term bonds.

Asset allocation funds invest in different mixes of securities, which vary depending on the funds’ goal. Funds such as target date funds, adjust their asset allocation over time while others, like target allocation funds, maintain a fixed asset allocation. Many investors use income replacement funds to help create an income stream in retirement. There are also income and real return strategies which are managed to help take advantage of certain outcomes, and world allocation funds which give fund managers the flexibility to seek opportunities anywhere in the world.

Domestic stock funds invest in stocks issued by U.S. companies. Many of these funds specialize in companies of various sizes, while others focus on either growth stocks or value stocks.

Index funds are the only funds that are not actively managed. Instead, they purchase most or all of the securities contained in a specific index with the intention of delivering the same performance as that index. There are different types of index funds—domestic stock, international stock, and bond—each of which offers different levels of risk.

Sector funds focus on one particular segment of the economy and invest in securities issued by companies concentrated in that segment.

International and global stock funds invest in stocks issued by companies located throughout the world, including, potentially, U.S. stocks. Some of these funds invest in companies located in emerging market countries and that can add an element of risk to those funds.

Real estate funds invest in companies that are tied to the commercial and residential real estate markets which could include mortgage companies, property managers, realtors, and builders. The companies held within the real estate funds are highly concentrated in a single industry so the funds tend to be riskier than other stock funds.

Commodity focused stock funds don’t invest directly in commodities, but they do invest in companies that are involved in commodity-intensive industries, such as energy exploration or mining. As a result, their performance can loosely track the performance of certain commodities. While these funds can be a great hedge against inflation, they can also be much more volatile than most stock funds.

Market neutral funds can maintain long and short positions in search of consistent returns approximately 3% to 6% above three-month Treasury bill yields, regardless of what direction the overall market moves. The positions in these funds can be in many different types of securities, including domestic and international stocks, ETFs, bonds, currencies, and commodities.

Inverse/leveraged funds are suitable for sophisticated investors willing to absorb potentially significant losses. . Inverse funds seek to increase in value when the market declines and decrease when the market rises, which is the opposite of traditional mutual funds. They are often used to profit from or hedge exposure to downward-moving markets. Leveraged funds seek to amplify the returns of a specific benchmark. Some funds are both inverse and leveraged, in that that they seek to achieve a return that is a multiple of the opposite performance of the underlying index or benchmark.

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Related Lessons

  • What are bond funds?

    For many investors, a bond fund is a more efficient way of investing in bonds than buying individual securities.

  • What are domestic stock funds?

    Domestic stock funds offer exposure to the world's largest, most liquid equity market, and can give investors the ability to own stocks in some of the world's most successful companies.

  • What are international & global stock funds?

    International stocks can be an important part of a diversified portfolio. Like all mutual funds, international and global stock funds can potentially invest in a large number of securities, giving you a cost-effective way to own shares in many different companies.

Mutual Funds at Fidelity

  • Mutual funds from Fidelity

    Investing with Fidelity gives you access to over 10,000 funds from hundreds of fund companies, making it easy to find the right funds for any investment need.

  • Research mutual funds

    Use our Mutual Fund Evaluator to search among thousands of funds available through Fidelity, filtering and sorting for a range of performance criteria and fund characteristics, including ratings from Morningstar and other independent experts.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information.  Read it carefully.

You could lose money by investing in a money market fund. Although the fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Fidelity Investments and its affiliates, the fund’s sponsor, have no legal obligation to provide financial support to money market funds and you should not expect that the sponsor will provide financial support to the fund at any time.

In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible.

The municipal market can be affected by adverse tax, legislative, or political changes, and by the financial condition of the issuers of municipal securities.

Stock markets are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments.

Foreign securities are subject to interest-rate, currency-exchange-rate, economic, and political risks
Because of their narrow focus, sector funds tend to be more volatile than funds that diversify across many sectors and companies. Each sector fund is also subject to the additional risks associated with its particular industry. For details about a particular sector fund’s risks, please see its prospectus.

Changes in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industry.

The commodities industry can be significantly affected by commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions.

The use of derivatives may expose funds to additional risks. Learn more about mutual funds and derivatives.
The Fund Evaluator is provided to help self-directed investors evaluate mutual funds based on their own needs and circumstances. The criteria entered is at the sole discretion of the user and any information obtained should not be considered an offer to buy or sell, a solicitation of an offer to buy, or a recommendation for any securities. You acknowledge that your requests for information are unsolicited and shall neither constitute, nor be considered as investment advice by Fidelity Brokerage Services, LLC., Fidelity Distributors Corporation, or their affiliates (collectively, "Fidelity").