Mutual funds are the easiest way to invest in stocks and bonds. A mutual fund is a pool of money that is then invested by a fund manager. In the broadest sense, no matter what the investment manager's goal or style, the fund will fall into a general category of investing: what the fund buys. There are three basic fund types: those that buy stocks, those that buy bonds, and those that invest in short-term holdings.

A money market fund buys short-term investments, typically Treasury Bills, savings bonds, and CDs. Money market funds provide a safe place to put money, which grows slowly, and provides returns somewhat greater than a bank savings' account. You don't risk losing the money put in, but it doesn't grow as quickly as most other types of funds. Many money market funds can also be used like a checking account. In general, money market funds are used as a safe place to keep money while waiting to invest it somewhere else.

An equity fund purchases only publicly traded stocks. Due to the large number of stocks and types of stocks, there are many different types of equity mutual funds. The primary objective of investing in an equity fund is for money to grow over the long-term and perhaps provide an income stream as well. More people invest in equity funds than any other type.

Within the universe of equity funds, individual funds can be classified by the life-stages, sizes, and business sectors of the stocks invested in, or by the specific investing strategy a manager uses. Funds commonly focus on a specific type of stock, or a combination of types to achieve an investment objective. For example, a fund typically focuses on buying one of the following groups of stocks or blending from these groups:

Value Stocks

Growth Stocks

Large-Cap Stocks

Mid-Cap Stocks

Small-Cap Stocks

Sector-Focused Stocks

Dividend-Paying Stocks

Another category of equity fund is an Index Fund, which attempts to match the performance and return of a broader market index such as the S&P 500 or Dow Jones Industrial Average.

Bond funds invest only in corporate and government bonds. Since these funds invest solely in bonds, they provide a steady stream of income back to the mutual fund. Holdings within a bond fund can appreciate in value, but the primary reason to buy a bond fund is to obtain consistent, conservative returns. Bond funds usually provide greater returns than CDs, savings, or money market accounts and, consequently, have some inherent risk. Bond rates depend on interest rates, so if rates go up, the fund value decreases. There are also many different types of bonds, some riskier investments than others. A bond fund is an important part of every portfolio, but most importantly for retirees looking for a steady income stream.

Besides these three basic fund types, there are a number of others:

Blended or balanced funds purchase a combination of both stocks and bonds. Balanced funds strive to attain an investment mix that provides lower risk, capital appreciation, and some income stream. Depending on the type of blended fund, a portfolio manager may decide to have more stocks than bonds, or vice versa, depending on the economy and business cycle. Other blended funds keep their mix steady.

International funds invest in stocks and bonds from other countries. They provide an alternative investment vehicle and outlook than a domestic-focused fund. Global funds invest in both stocks and bonds from other countries and nationally.

Depending on how one purchases a mutual fund, there are two different categories:

A no-load fund is purchased directly from a mutual fund company, and no sales or redemption fee is charged.

Load funds require the buyer to pay a sales commission, which goes to the seller of the mutual fund shares. Typically, for most load funds, there exists a similar no-load or low-load mutual fund. The load usually eats into gains, hurting overall performance.

A few good places to research mutual fund types and their performance:

Morningstar

http://www.morningstar.com

Mutual Fund Investor's Center

http://www.mfea.com

Kiplinger

http://www.kiplinger.com

Lipper

http://www.lipper.com