4 Types of Mutual Funds for Passive Income

There are 4 types of mutual funds. Mutual funds are one of the best investments if you want to supplement your regular income or grow your wealth over time. Funds can vary and each has its own set of risks and rewards. There are thousands of mutual funds but most mutual funds fall into one of these categories.

The 4 Types of Mutual Funds

Equity Funds

Equity Funds

Equity mutual funds are run by professional money managers who attempt to beat the market by picking stocks they believe will outperform the rest of the market. Equity funds are also categorized as stock funds because equity funds invest in stocks. Two different types of equity funds include index and actively managed funds.

Index funds track a specific market index, such as the Standard & Poor’s 500 Index, and try to match its performance. Actively managed equity funds are managed by fund managers who select the individual stocks in the fund.

Both index and actively managed equity funds offer diversification and professional management, which can help mutual fund investors achieve their financial goals. However, there are some differences to consider before investing in either type of fund.

For example, index funds generally have lower fees than actively managed equity funds because they don’t have the same expenses associated with hiring a professional manager.

Fixed-Income Mutual Funds

Fixed Income Mutual Funds

Fixed-income funds are mutual funds that invest in bonds and other debt instruments. These funds buy investments that pay a fixed rate and are often low risk and provide stability and income, making them ideal for investors looking for passive income.

One advantage of investing in this type of fund is that you don’t have to worry about the ups and downs of the stock market. These funds tend to be less volatile than stock funds, which means your investment is less likely to lose value. Additionally, fixed-income funds often pay regular dividends, which can provide you with a steady income stream.

Fixed-income funds can vary greatly in their level of risk, with some being virtually guaranteed to pay interest and others having the potential for higher interest but also the possibility of default.

Money Market Funds

Money Market Funds

Money market funds invest in short-term debt instruments, making them less volatile than the other types.

Money market funds try to keep an investment in cash and cash equivalents and the rest in short-term debt instruments. These types of investments are considered to be extremely low-risk, although some money market funds have had losses during the financial crisis that began in 2008.

Money market funds typically have low expense ratios and can be a good option for investors looking for a place to park their cash. However, because money market funds are often invested in short-term debt instruments, they may not offer the same level of return as the other types.

Still, money market funds can be a good option for investors who want to generate passive income and don’t mind sacrificing some potential return for the stability these different types of investment trusts can provide.

Index Funds

Index Funds

These funds track a specific market index, such as the S&P 500 or Philippine Stock Exchange (PSE), and aim to match the performance of that index. They are often used as a passive investing strategy, offering broad diversification and low expenses.

Index funds can be a good choice for investors looking to generate passive income, as they offer diversification and low expenses. However, it is essential to remember that these funds can still be volatile, so it is crucial to understand the risks before investing.

There are two types of index funds: balanced funds and hybrid funds.

Balanced funds invest in a mix of capital appreciation and income, while some are designed to provide income alone. Generally, balanced funds invest in a mixture of stocks and bonds. The stock portion is normally between 40% and 70%, while the bond funds can vary dramatically between 30% and 60%. Bond funds invest in a portfolio of fixed-income securities, such as government, corporate and municipal bonds.

While balanced funds are a mix of stocks and bonds, Hybrid Funds also invest in other asset types, such as real estate and commodities. Because of this additional diversification, investors can expect higher returns than with typical balanced funds.

What are Mutual Funds?

A mutual fund is an investment that allows people to pool their money together and invest it in various securities, such as stocks, bonds, and other assets. It is managed by professional money managers in an investment company who try to maximize returns and minimize risk.

What is Passive Income?

Passive income is when you earn money without having to do any work. For example, if you own a rental property, you can earn passive income from the rent tenants pay. Another example is if you have a website and people buy products through it, you can earn passive income from the commissions.

Why Do People Buy Mutual Funds?

People buy these funds because they can pool their money together with other investors, spread the risk around and invest in a group of stocks or bonds. Mutual funds allow diversification. It also reduces risk so that if one stock goes down, the others might go up.

Benefits and Risks of Mutual Funds

Risks and Benefits of Mutual Funds

When investing in mutual funds, it’s essential to understand the potential risks and rewards. While it can offer various benefits, there are also some potential drawbacks.


Two main advantages stand out: professional management and diversification.

Professional management can greatly benefit investors who don’t have the time or expertise to manage their portfolios. Mutual fund managers are experienced professionals responsible for making investment decisions and managing the fund’s day-to-day operations.

Another benefit of mutual funds is diversification. Investing in a fund can gain exposure to various asset classes and investments. Diversification helps reduce your overall risk by providing a cushion against losses in any area. Mutual funds typically are easy to buy and sell. You can purchase them through a financial professional or online broker. You can also sell your shares at any time by instructing your broker to do so.


Every potential investor should be aware of a few risks before deciding to invest their hard-earned money: market risk and fees.

The first risk is that these investments are subject to market risk, which means that the mutual fund’s value can go up or down in response to changes in the overall stock market. Even if you pick a fund with a good track record, there’s no guarantee that it will continue to perform well in the future.

Another risk is that fees and expenses can eat into your investment returns. Make sure you understand all the fees associated with a particular fund before you invest, as they can significantly impact your bottom line.

Frequently Asked Questions

What Types of Mutual Funds are There?

There are 4 main types of mutual funds. They are equity, fixed income, money market, and index funds.

How Are Mutual Funds Priced?

They are priced in different ways, depending on the type of fund. For example, index funds are priced based on the value of the underlying securities, while actively-managed funds are priced based on the fund’s Net Asset Value(NAV).

NAV is calculated by taking the total value of the mutual fund and subtracting any liabilities. To compute NAV per share, divide NAV by the number of shares outstanding.

Mutual funds are bought and sold at their NAV. However, price variation can vary depending on whether you’re buying or selling shares. If you’re buying shares, you’ll usually pay the fund’s current NAV.

How Are Returns Calculated for Mutual Funds?

When you invest in a mutual fund, you pool your money with other investors to buy a portfolio of stocks, bonds, or other securities. The fund’s managers calculate the return on your investment based on the performance of the securities.

There are four main types of returns that you can earn: interest, dividends, capital appreciation, and realized & unrealized gains.

Interest is earned in bonds or other fixed-income security investments. Bonds yield higher returns than savings accounts or certificates of deposit (CDs). There are two types of bonds: government or sector funds. Sector funds are also known as specialty funds, and they invest in a sector of the market such as technology, health care, or real estate.

Dividends are payments made by companies to their shareholders. When a mutual fund is invested in stocks, it may receive dividend payments from the companies it invested in.

Capital appreciation funds seek investments that increase value over time. These are realized when a fund sells securities that have increased in value.

Realized and unrealized gains result from changes in the value of stocks or bonds held by the fund.

Are Mutual Funds a Safe Investment?

Like any other type of investment, there are risks involved with mutual funds. For example, if the market value declines, your assets may lose value. Additionally, fees and expenses can eat into your returns.

Despite these risks, mutual funds can be a safe investment if you carefully choose the right ones. Mutual funds can be an excellent way to diversify your portfolio and spread your risk among many different investments.

Can Mutual Fund Shares Be Sold at Any Time?

Yes, you can sell your mutual fund shares at any time. However, it’s important to note that there may be fees associated with selling your shares and depending on the type of the fund, you may also owe taxes on any gains.

Which mutual fund type charges the highest fees?

Mutual funds charge fees for professional management. Of the four types, actively managed funds (a type of equity fund) tend to have the highest fees.

Actively managed mutual funds are those where a team of professional investors manages the fund daily, deciding which stocks or other assets to buy or sell. This management comes at a cost – these funds typically have higher expense ratios than different types of mutual funds. For example, actively managed funds following an expense ratio of 1% will charge $10 (Php 550) in fees for every $1,000 (Php 55,000) invested.

Money market mutual funds usually have the lowest fees since they are passively managed. Mutual funds can have an expense ratio as low as 0.04% or even 0.01% for some bond funds.

What mutual fund type has the investment objective of capital appreciation?

Equity funds. Equity funds are generally growth funds and it seeks to achieve capital appreciation by investing in companies with solid earnings growth potential.

Which type of mutual fund is best for the long term?

As mentioned, mutual funds fall into one of four main categories but there is no definite answer to this question. Once you know the basics of investing, you can start to think about which type is best for your needs. If you’re looking to invest for the long term, you should keep a few things in mind.

First, you’ll want to consider your investment goals. What are you hoping to achieve by investing in a mutual fund? Are you looking to grow your wealth over time or generate income through dividends? If you’re looking for growth, then consider equity funds. If you want consistent dividends coming into the fund, then fixed-income funds are for you.

Second, you’ll want to consider your investment risk tolerance. How much volatility are you comfortable with in your investments? Some mutual funds carry more volatility than others, so it’s essential to find one that fits your risk profile.

Finally, you’ll want to look at the fees associated with each mutual fund. Some funds have higher fees than others, affecting your returns over time.

Final Thoughts

There are many investment vehicles to choose from. The key is finding the one that suits your individual needs and goals. Use these steps as a guide, and you’ll find the best investment for you.

There is no one-size-fits-all solution when it comes to investing in mutual funds. Different types of mutual funds provide different values and may be more appropriate depending on your investment style, objectives, and risk tolerance.

Some final thoughts to keep in mind:

  1. Before investing in any mutual fund, read the prospectus carefully. This document will provide important information about the fund’s investment strategy, fees, and performance history. Also, take note of the initial investment.
  2. It’s also a good idea to consult with a financial advisor to get guidance on which type of fund may be right for you. Overall, it depends on your investment choices.
  3. And finally, remember that no mutual fund investments are without risk. Even the most conservative mutual fund can lose value in a down market. But over time, diversified portfolios tend to offer the best chance for consistent growth and income generation.
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Written byPaul Dabuco
I'm Paul Dabuco, the man behind Juan Investor, one of the top personal finance blogs in the Philippines. I’m passionate about investing and digital marketing. When I’m not blogging, I’m either tinkering on my clients’ Facebook ads or beachbumming. You can read more about me.

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  1. Avatar of Marco
    Marco 08/19/2022 at 17:12 - Reply

    Where do I invest mutual funds in Philippines? Do you know some providers? Thanks

    • Avatar of Paul Dabuco
      Paul Dabuco 08/19/2022 at 17:17 - Reply

      Some of the best mutual fund companies in the Philippines: Sun Life, ATR KimEng, PhilAm Fund.
      I’ll write more about this, soon :)

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