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Mutual funds are generally categorized by the following four major asset classes in which they may invest.
Cash Equivalent Funds
Providing safety plus interest income, cash equivalent funds have the lowest risk and can add stability and liquidity to your portfolio. They are also a good choice if you need quick access to your money or are looking for an alternative to savings accounts or other short-term investments.
Income Funds
These funds offer the potential for higher interest income than cash equivalent funds, but at a greater risk. Income funds are a good choice if you want higher income in the medium- to long-term and if you can accept possible declines in the value of your investment in the short-term.
Equity Funds
These funds offer the greatest potential for long-term growth but have a higher risk than income funds. They are a good choice if you don't need income and can accept possible declines in the value of your investment in the short-term. Canadian equity funds invest mainly in securities of Canadian companies. Foreign equity funds invest mainly in securities of companies located outside of Canada, and are a convenient way to achieve geographic diversification in your portfolio.
Balanced Funds
Offering a combination of equity, fixed income and cash equivalent securities in a single investment, the asset allocation of each balanced fund is adjusted as market conditions change. This increases the potential for higher returns while managing risk. Balanced Funds are generally less volatile than equity funds, but more volatile than income funds.
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