The vast majority of funds fall into one of four categories based on what they invest in: stocks (also called equities), bonds, money market investments, and a combination of all of the above. For example, if you invest money in an equity fund, just about all of it will likely be invested in stocks.
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Equity funds are the riskiest and have the greatest profit potential, with growth and perhaps some income as their primary objective. Bond funds invest in bonds to earn higher income for investors at a moderate level of risk, generally. Money market funds are the safest and pay interest rates that vary with interest rates in the economy. Balanced funds are the fourth category and invest in a balance of the other three major investment asset classes; and this makes them a great place to start investing.
Income or interest earned in a mutual fund is paid to investors in the form of dividends. Most investors simply choose to have their dividends automatically reinvested to buy additional shares in the fund in order to make their investment grow faster. What makes investing for beginners a challenge is that each general fund category has a number of varieties.