2. Income Funds

Income funds are named for their purpose: to provide current income on a steady basis.

These funds invest primarily in government and high-quality corporate debt, holding these bonds until maturity in order to provide interest streams.

While fund holdings may appreciate in value, the primary objective of these funds is to provide a steady cash flow to investors.

As such, the audience for these funds consists of conservative investors and retirees.

Because they produce regular income, tax conscious investors may want to avoid these funds.

4. Balanced Funds

The objective of these funds is to provide a balanced mixture of safety, income and capital appreciation.

The strategy of balanced funds is to invest in a portfolio of both fixed income and equities.

A typical balanced fund will have a weighting of 60% equity and 40% fixed income.

The weighting might also be restricted to a specified maximum or minimum for each asset class, so that if stock values increase much more than bonds, the portfolio manager will automatically rebalance the portfolio back to 60/40.

A similar type of fund is known as an asset allocation fund.

Objectives are similar to those of a balanced fund, but these kinds of funds typically do not have to hold a specified percentage of any asset class.

The portfolio manager is therefore given freedom to switch the ratio of asset classes as the economy moves through the business cycle.

6. Global/International Funds

An international fund (or foreign fund) invests only in assets located outside your home country.

Global funds, meanwhile, can invest anywhere around the world, including within your home country.

It's tough to classify these funds as either riskier or safer than domestic investments, but they have tended to be more volatile and have unique country and political risks.

On the flip side, they can, as part of a well-balanced portfolio, actually reduce risk by increasing diversification since the returns in foreign countries may be uncorrelated with returns at home.

Although the world's economies are becoming more interrelated, it is still likely that another economy somewhere is outperforming the economy of your home country.

8. Socially-responsible Funds

Socially-responsible funds (or ethical funds) invest only in companies that meet the criteria of certain guidelines or beliefs.

For example, some socially responsible funds do not invest in “sin” industries such as tobacco, alcoholic beverages, weapons or nuclear power.

The idea is to get competitive performance while still maintaining a healthy conscience.

Other such funds invest primarily in green technology such as solar and wind power or recycling.

Index Funds

Index funds are passively managed funds that seek to replicate the performance of a broad market index such as the S&P 500 or Dow Jones Industrial Average (DJIA).

An investor might consider an index fund if they subscribe to the logic that most active portfolio managers cannot beat the market on a regular basis.

Since an index fund merely replicates the market return it also benefits investors in the form of low fees.

Index funds have been increasing in popularity since Vanguard pioneered the way for passive indexing in mutual fund form.

Exchange Traded Funds (ETFs)

A twist on the mutual fund is the exchange traded fund, or ETF.

These ever more popular investment vehicles pool investments and employ strategies consistent with mutual funds, but they are structured as investment trusts that are traded on stock exchanges, and have the added benefits of the features of stocks.

For example, ETFs can be bought and sold at any point throughout the trading day. ETFs can also be sold short or purchased on margin.

ETFs also typically carry lower fees than the equivalent mutual fund.

Many ETFs also benefit from active options markets where investors can hedge or leverage their positions.

ETFs also enjoy tax advantages from mutual funds.

The popularity of ETFs speaks to their versatility and convenience.