Most people don't know that financial funds offer significantly better returns than fixed deposits and are considerably safer than direct equity investments.

One of the advantages of investing in a financial fund is that you get to be a part owner in an investment vehicle that you may have always wanted to deal with but could not afford to own. For instance, it would be very difficult for an individual investor to own even ten stocks of a company such as Berkshire and Hathaway, which could cost you as much as $12,000.

Financial funds are also appropriate for people who cannot afford to significantly diversify their portfolio to mitigate investment risks and for those who are just exploring the world of investment vehicles. Here is a look at the different types of financial funds and the investor profile that they suit.

Bond/ Income funds: As the name suggests, this type of financial funds invest in different types of bonds (not zero coupon); the primary objective is to offer investors a steady stream of income. Investments are predominantly made in government and municipal bonds. Although the value of the fund holding increases in time, most people who invest in bond/ income funds are looking for a secondary source of income.

Bond funds are safer than the other types of financial funds; however, like all investment vehicles, bond funds are not devoid of risks; they are impacted by interest rate fluctuations. The price of bon funds deteriorates as the interest rate goes up. Also, an investor should carefully analyze the type of bonds that the financial fund deals in. For instance, a bond fund that exclusively deals in high yield junk bonds will be riskier than a fund that puts the investorâ€TMs money in government or municipal bonds.

Money Market funds: If you have a low appetite for risk, money market fund will be the right choice; these investments are based on treasury bills and short term debt instruments hence they are the safest type of financial funds in the market. However, keeping with the principle of investment where higher risk also equates to the possibility of higher rewards your returns will not be too great. Typically, you can expect to make about twice of what you would in a bank account.

Balanced Fund: This type of fund combines the goals of capital appreciation as well as regular income; investments are a combination of equities and fixed income investment vehicles, with 60% of the latter and 40% of the former. The weighting may differ; however, it will be restricted to a certain minimum and maximum allowable amount for each type of investment. If you are looking forward to building a nest egg while receiving a side income to take care of your regular expenditures; this will be an appropriate fund for you.

Equity Fund: Most financial funds are of this type where the investments are made in equities and their derivatives. However, because there are different types of equities in the market based on the size and earnings of the company to the type of stock (proffered or common), you need to be careful with the selection of such funds. While investing in this type of fund, you need to analyze the value of the stocks in the fund; the blend of the shares and the growth potential of the fund. You should also gauge the size and the earning potential of the businesses that the fund invests in. For instance, you can get an equity fund that only puts your money in blue chip companies while there are others that exclusively deal with penny stocks. Needless to say, the former will be considerably safer than the latter.

Specialty Funds: This is an umbrella term that encompasses a variety of funds that do not fit in the categories mentioned above. For instance, you could have a sector fund where investments are made in a specific sector such as oil and natural gas; commodity fund, here the investments are made in commodities including gold and crude oil etc; socially responsible fund where investments are made in the shares of companies that meet specific guidelines, or a regional fund in which investments are made in the stocks of companies in a certain region. This type of financial fund is appropriate for people with knowledge of the area in which investments are being made.