Mutual funds are still the favoured investment product by most Canadians -- and it's easy to see why. There are so many options to choose from that you can almost always find something to fit into a portfolio. But to pick correctly, you need to understand the differences between various funds. Here we explain six types of mutual funds and why you may or may not want to include them in your investments.

1. Equity funds

If you want to have money in the stock market, but don't want to choose companies yourself, then consider owning some equity funds. These securities typically have 90 per cent of their assets invested in stocks.

Because these funds are so exposed to equities, they're riskier than other types of funds, but if you think the market is going to rise, it's the best way to make a profit.

2. Balanced funds

As the moniker suggests, balanced funds are a mix of bonds and equities. The balanced approach -- the funds usually hold 60 per cent stocks and 40 per cent bonds -- tends to do better in downturns and not as well in up markets as equity funds. That's because the bonds, which are safer investments, mitigate the stock market's impact.

These funds are for people who want to take on less risk in a portfolio. It's an ideal solution for retirees who want to both protect and grow their money.

3. Bond funds

If equity funds are on one side of the spectrum, bond funds are on the other. These funds typically hold at least 90 per cent of assets in fixed-income. Since bonds are considered safer than stocks, these funds typically help portfolios stay afloat in downturns.

Many stock pickers will own a bond fund. It's much more difficult to buy individual bonds than stocks, so people of all investing stripes purchase these funds to hold some fixed income.

4. Index funds

Index funds are securities that track an index like the S&P 500. They're a lot like exchange-traded funds, in that these funds own a piece of every stock on an index, but they're bought and sold via mutual fund channels. (ETFs are traded on the stock market; funds are not.)

These funds are the cheapest of the bunch in terms of fees because they don't require stock picking, which means there are no portfolio managers to pay. This is a great option for every type of investor. While index funds are generally equity focused, they often perform better than equity funds because the low fees don't eat into returns.

5. Dividend/income funds

Dividend funds, also known as income funds, are baskets of stocks and bonds (or one or the other) that spin off a regular quarterly or annual payment to unit holders. They invest in securities that pay dividends -- in the case of stocks, a payment made by a company to shareholders; for fixed-income, the interest payment bondholders receive.

Many people like this option because it gives them some extra cash, which they can use to pay for everyday expenses or reinvest into more funds.

6. Money market funds

These funds are one of the safest investments you can find. The fund is invested in short-term debt, treasury bills issued by governments and other high-quality government bonds. Don't expect a big payday with these funds -- interest rates are so low today that they barely make money. But if you want to tuck a few bucks away into a safe investment just in case, then this is a good bet.

Most of these funds are further divided into Canadian, global and international categories -- you can also find country-specific equity and balanced funds. What you choose depends on your risk tolerance. But even stock-crazy investors may want to buy one bond fund. You never know which way the markets will go.

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