From Dustin Woodard,
Your Guide to Mutual Funds.
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Being a collection of many stocks, you may have thought that picking a mutual fund might be easy. Not necessarily... there are over 10,000 mutual funds to choose from. It is easier to think of mutual funds in categories.

I won't discuss every category because this article is designed for the beginning investor (read other articles on this site for more in-depth information on funds).

Money Market Funds
These funds are a great place to park your money. Whether you're storing money for emergencies, saving for the short-term, or looking for a place to store cash from the sale of an investment, money market funds are a safe place to invest. These funds invest in short-term debt instruments and typically produce interest rates that double what a bank can offer in a checking account or savings account and rival the returns of a CD (Certificate of Deposit). The beauty of money market funds is that you can often write checks out of your account and they provide a high amount of liquidity (ability to cash out quickly) not found in CD's. These funds are not FDIC insured, but in the history of money market funds no money market fund has ever folded, yet many banks have failed and many investors with over $100,000 lost out.

Bond Funds
Bond funds carry more risk than money market funds are often used to produce income (useful in retirement) or to help stabilize a portfolio (diversification). The primary types of bond funds are:

• Municipal Bond Funds -uses tax-exempt bonds issued by state and local governments (these funds are non-taxable).
• Corporate Bond Funds -uses the debt obligations of U.S. corporations.
• Mortgage-Backed Securities Funds - uses securities representing residential mortgages.
• U.S. Government Bond Funds -uses U.S. treasury or government securities.

Another way bond funds are often classified is by maturity, or the date the borrower (whether it be the bank, the government, a corporation or an individual) must pay back the money borrowed. Using this classification bonds are often called short-term bonds, intermediate-term bonds, or long-term bonds.

Stock Funds
Stocks funds are considered riskier than bond funds (although certain bond funds can be very risky) and are used for growing your money. Money market funds and bond funds typically provide returns just a percentage or two above inflation, but stock funds should do much better over long periods of time.

Click here: to Continue with the article and read about different kinds of Stock Funds.