What are the different types of mutual funds?

There are four broad types of mutual funds: Equity (stocks), fixed-income (bonds), money market funds (short-term debt), or both stocks and bonds (balanced or hybrid funds).

What is an index fund?

An index fund is a type of mutual fund whose holdings match or track a particular market index. It's hands-off, and you could build a diversified portfolio earning solid returns using mostly this type of investment.

What is a closed-end fund?

Closed-end funds are a lesser-known kind of mutual fund. Your best odds of success come when you buy them at a discount.

What is a target-date fund?

Target-date funds are designed to age with you by automatically rebalancing your portfolio from growth investments toward more conservative ones as retirement nears.

What are money market funds?

Money market mutual funds are popular short-term investments with low risk. Yields on money market funds are more appealing than they used to be.

What is an equity fund?

Equity funds buy stock in a range of companies. Unless you have cash and time to burn, they're the better way to invest than buying individual company stocks.

Mutual Funds

Mutual funds are investments that pool together investor money to buy a selection of assets. Mutual funds can help investors quickly build a diversified portfolio.

Many, or all, of the products featured on this page are from our advertising partners who compensate us when you take certain actions on our website or click to take an action on their website. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here's how we make money.

The investing information provided on this page is for educational purposes only. NerdWallet, Inc. does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments.

What are mutual funds?

Mutual funds are a type of investment that pools together money from many investors, then uses that money to invest in stocks, bonds or other assets.

Mutual funds are typically managed by a professional who selects the investments for the fund.
There are mutual funds to suit most investment styles and goals.
Mutual fund investors don’t directly own the stock or other investments held by the fund, but they do share equally in the profits or losses of the fund’s total holdings — hence the “mutual” in mutual funds.
Index funds and exchange-traded funds are similar to mutual funds in that they hold a number of different assets within a single investment.

Benefits of mutual funds

Simplicity: Once you find a mutual fund with a good record, you have a relatively small role to play: The fund managers do all the heavy lifting of selecting and rebalancing investments.

Low costs: Investing costs have come down, and that extends to mutual funds. Mutual funds can be an inexpensive way to hold many investments at once. Passive funds like index funds and ETFs are even more cost-effective.

Diversification: Mutual funds provide access to a large selection of investments without the difficulties of having to purchase and monitor dozens of individual assets yourself.

Types of mutual funds

Stock (equity) funds

Stock mutual funds typically carry the greatest risk alongside the greatest potential returns. Fluctuations in the stock market can drastically affect the returns of equity funds. There are several types of equity funds, such as growth funds, income funds and sector funds. Each of these groups tries to maintain a portfolio of stocks with certain characteristics.

Bond funds

Bond funds are typically less risky than stock funds. There are many different types of bonds, so you should research each mutual fund individually in order to determine the amount of risk associated with it. (View our list of the best-performing bond ETFs.)

Money market mutual funds

These mutual funds often have the lowest returns because they carry the lowest risk. Money market funds are legally required to invest in high-quality, short-term investments that are issued by the U.S. government or U.S. corporations.

Target date funds

Target date funds typically invest in a mix of stocks, bonds and other securities. These funds choose their investment mix based on a defined timeline, and often have a year in their name. They reallocate assets toward safer investments as that year approaches. They are a frequent offering in retirement plans like 401(k)s.

The 3-fund portfolio

6:38

Building a portfolio with mutual funds

Building the best investment portfolio for you can be challenging. There are lots of mutual funds out there — how do you know which is the best? With just three types of mutual funds, you can build a well-diversified portfolio quickly based on your time horizon and risk tolerance. NerdWallet's Marko Zlatic walks through all the details in this video.