Mutual funds can be divided into three major categories depending on the allocation of funds and investment strategies. These include equity funds or stocks, fixed-income funds or bonds and money market funds. Under these, there are various other kinds of mutual funds.

Money market funds, also known as treasury bills, are the safest type of mutual funds for investment and they are considered ideal for those who do not want to take any risk. These funds are the most conservative type of investment where funds are invested in government securities and short-term debt instruments. While these funds do not promise any hefty returns, they also do not undergo any fluctuations. Hence, one need not worry about losing principal. Typically, rates of return would be 1-2 percent more than savings account.

Fixed-income funds or bond funds are a bit riskier than money market funds. These mutual funds operate with the objective of providing higher returns and regular income payments to investors. Funds are typically invested in treasury bills, debentures, bonds and mortgages. Some important types of fixed-income funds include municipal bond funds, corporate bond funds, mortgage-backed securities funds and the U.S. government bond funds. Depending on the fund allocation, risk involved in bond funds can vary.

In case of equity funds, assets are invested primarily in stocks. Investment in equity funds is associated with great amount of risk. Equity funds are introduced with the objective of long term capital gains with some income to the investors. Depending on the investment, equity funds can be further classified into growth funds and specialty funds.