|
Types of Mutual Funds
This section provides descriptions
of the characteristics -- such as investment objective and potential for
volatility of your investment -- of various categories of funds. These descriptions
are organized by the type of securities purchased by each fund: equities,
fixed-income, money market instruments, or some combination of these.
This
table organizes these fund types by how aggressive
or conservative they are and by investment objective. Because mutual funds
have specific investment objectives such as growth of capital, safety of
principal, current income or tax-exempt income, you can select one fund
or any number of different funds to help you meet your specific goals. In
general mutual funds fall into these general categories:
-
Equity Funds invest in shares of common stocks.
-
Fixed-Income Funds invest in government or corporate
securities which offer fixed rates of return.
-
Balanced Funds invest in a combination of both stocks and bonds. -
Money Market Funds for high stability of principal,
liquidity and income. -
Bond Funds, both tax-exempt and taxable funds to generate
income. -
Specialty/Sector Funds to diversify holdings within an
industry.
| Aggressive Growth Funds
|
| What they invest in: |
These funds seek maximum growth of capital with secondary emphasis
on dividend or interest income. They invest in common stocks with a high potential
for rapid growth and capital appreciation.
Because they invest in stocks which can experience wide swings up or down,
these funds have a relatively low stability of principal. They often invest
in the stocks of small emerging growth companies and generally provide
low current income because these companies usually reinvest their profits
in their businesses and pay small dividends, if any. Aggressive growth
funds generally incur higher risks than growth funds in an effort to secure
more pronounced growth. These funds may invest in a broad range of industries
or concentrate on one or more industry sectors. Some use borrowing, short-selling,
options and other speculative strategies to leverage their results. |
| Suitable
for: |
Investors who can assume
the risk of potential loss in value of their investment in the hope of
achieving substantial and rapid gains. They are not suitable for investors
who must conserve their principal or who must maximize current income. |
| Growth Funds |
| What they invest in: |
Generally invest in stocks for growth rather than current income.
Growth funds are more likely to invest in well-established companies
where the company itself and the industry in which it operates are thought
to have good long-term growth potential.
Growth funds provide low current
income, but the investor's principal is more stable than it would be in
an aggressive growth fund. While the growth potential may be less over
the short term, many growth funds have superior long-term performance
records. They are less likely than aggressive growth funds to invest in smaller companies
which may provide short-term substantial gains at the risk of substantial
declines. |
| Suitable
for: |
Although growth funds are more conservative than aggressive growth funds,
they are still relatively volatile. They are suitable for growth-oriented
investors but not investors who are unable to assume risk or who are dependent
on maximizing current income from their investments. |
| International/Global Funds |
| What they invest in: |
International funds seek growth through investments in companies outside
the United States. Global funds seek growth by investing in securities around
the world, including the United States. Both provide investors with another
opportunity to diversify their mutual fund portfolio, since foreign markets do not
always move in the same direction as the U.S.
The best way to invest abroad is through mutual funds, rather than direct
investment in a foreign security. Most investors are unfamiliar with foreign
investment practices and currencies and may not have a clear understanding
of how economic or political events can affect foreign securities. An
investor in an international mutual fund doesn't have to worry about trading
practices, recordkeeping, time zones or other laws and customs of a foreign
country -- that is all handled by the fund's money manager.
International and global funds can invest in common stocks or bonds of
foreign firms and governments. Many international funds invest in a
particular country or region of the world. |
| Suitable
for: |
While international and global funds offer
opportunities for growth and diversification, these types of funds do
carry some additional risks over domestic funds and should be carefully
evaluated and selected according to the investor's objectives, timeframe
and risk profile. Because most international and global funds are considered
to be aggressive growth funds or growth funds, investors must be willing
to assume the risk of potential loss in value in the hope of achieving
substantial gains. They are not suitable for investors who must conserve
their principal or maximize current income. |
| Growth and Income Funds |
| What they invest in: |
Growth and income funds seek long-term growth of capital as well as current
income. The investment strategies used to reach these goals vary among funds.
Some invest in a dual portfolio consisting of growth stocks and income
stocks, or a combination of growth stocks, stocks paying high dividends,
preferred stocks, convertible securities or fixed-income securities such
as corporate bonds and money market instruments. Others may invest in
growth stocks and earn current income by selling covered call options
on their portfolio stocks. |
| Suitable
for: |
Growth and income funds have low to moderate stability of principal and
moderate potential for current income and growth. They are suitable for
investors who can assume some risk to achieve growth of capital but who
also want to maintain a moderate level of current income. |
| |
| What they invest in: |
The goal of fixed income funds is to provide high current income consistent
with the preservation of capital. Growth of capital is of secondary importance.
Income funds that invest primarily in common stocks are classified as
equity income funds (see next listing). Those that invest primarily in
bonds and preferred stocks are classified as fixed-income funds. These
funds invest in corporate bonds or government-backed mortgage securities
that have a fixed rate of return.
Since bond prices fluctuate with changing interest rates, there is some
risk involved despite the fund's conservative nature. When interest rates
rise, the market price of fixed-income securities declines and so will
the value of the income funds' investments. Conversely, in periods of
declining interest rates, the value of fixed-income funds will rise and
investors will enjoy capital appreciation as well as income.
Fixed-income funds offer a higher level of current income than money market
funds, but a lower stability of principal. They are generally more stable
in price than funds that invest in stocks. Within the fixed-income category,
funds vary greatly in their stability of principal and in their dividend
yields. High-yield funds, which seek to maximize yield by investing in
lower-rated bonds of longer maturities, entail less stability of principal
than fixed-income funds that invest in higher-rated but lower-yielding
securities.
Some fixed-income funds seek to minimize risk by investing exclusively
in securities whose timely payment of interest and principal is backed
by the full faith and credit of the U.S. Government. These include securities
issued by the U.S. Treasury, the Government National Mortgage Association
("Ginnie Mae" securities), the Federal National Mortgage Association ("Fannie
Maes") and Federal Home Loan Mortgage Corporation ("Freddie Macs"). All
are backed by pools of mortgages. |
| Suitable
for: |
Fixed-income funds are suitable for investors who want to maximize current
income and who can assume a degree of capital risk in order to do so.
Again, carefully read the prospectus to learn if a fund's investment policy
with respect to yield and risk coincides with your own objectives. |
| Balanced/Equity Income funds |
| |
| What they invest in: |
Equity income funds
seek high current yield by investing primarily in equity securities of
companies which pay high dividends. Unlike interest payments on bonds,
dividends on equity securities can change as companies raise or lower
their dividends. Since yield-oriented stocks are more volatile than comparably
rated fixed-income securities, equity income funds offer less stability
of principal than fixed-income funds. Balanced funds are more evenly invested
in equities and income securities. |
| Suitable
for: |
Balanced and equity income funds are suitable for conservative investors
who want high current yield with some growth. |
| |
| What they invest in: |
For the cautious investor, these funds provide a very high stability of
principal while seeking a moderate to high current income. They invest in
highly-liquid, virtually risk-free, short-term debt securities of agencies of
the U.S. Government, banks and corporations and U.S. Treasury Bills. They have
no potential for capital appreciation.
Tax-exempt money market funds invest in securities that provide safety
of principal, liquidity and income exempt from federal income taxes by
investing in short-term, high-rated municipal obligations.
Because of their short-term investments, money market mutual funds are able
to keep a constant share price; only the yield fluctuates. Therefore, they
are an attractive alternative to bank accounts. With yields that are generally
competitive with -- and usually somewhat higher than -- yields on bank certificates
of deposit (CDs), they offer several advantages:
-
Money can be withdrawn any time without penalty.
Money market funds also offer check writing privileges.
-
Although not insured by the FDIC or FSLIC, money market funds invest
only in highly-liquid, short-term, top-rated money market instruments.
-
Money market funds are suitable for conservative investors who want high stability
of principal and moderate current income with immediate liquidity.
|
| Suitable
for: |
Money market funds are suitable for conservative investors who want high stability
of principal and moderate current income with immediate liquidity.
|
| |
|
|
| What they invest in: |
"Muni" bond funds provide higher tax-exempt income than tax-exempt money
market funds by investing in longer-maturity (and often lower-rated) securities,
which generally offer higher yields than the short-term, high-rated securities in
which tax-exempt money market funds invest.
Municipal bond funds vary greatly in the quality and maturity of the municipal
bonds they invest in. The longer the maturity, the higher the yield. Also,
the lower the credit rating of the issuer, the greater the risk and the
higher the yield.
While municipal bond funds generally provide lower yields than income funds
with debt obligations of similar maturities and ratings, for an investor
in a high marginal tax bracket the after-tax yields of municipal bond funds
will be higher. The price and yield of municipal bond funds will fluctuate
moderately with interest rates. As interest rates decline, the value of
principal increases while yield decreases; as rates increase, bond prices
decline but yields increase. |
|
| Suitable
for: |
Suitable for investors in medium to higher tax brackets
who want current income free from federal income tax. |
|
| Double & Triple Tax-Exempt Bond Funds |
| |
| What they invest in: |
These bond funds provide the investor with an even greater tax advantage
by investing in municipal bonds of a single state. Triple tax-exempt funds
are exempt from income tax in a specific city. Thus they generate income
exempt from not only federal income tax but also from state and/or city income tax
for residents of those jurisdictions. Like all bond funds, the value of
the shares will fluctuate with interest rates, as will the current yield.
Also, the stability of principal and yield levels vary with the quality
and maturity length of the bonds in which the funds invest. Lack of geographic
diversification increases credit risk of these funds compared with national
funds. |
| Suitable
for: |
These funds are suitable for investors in medium to high tax brackets
in high tax states who want income with maximum exemption from taxes. |
| |
| What they invest in: |
These funds invest in securities of a specific industry or sector of the
economy such as health care, high technology, leisure, utilities or precious
metals.
Because such funds invest primarily in one sector, they do not offer the
element of downside risk protection found in mutual funds that invest in
a broad range of industries. However, the funds do enable investors to diversify
holdings among many companies within an industry, a more conservative approach
than investing directly in one particular company.
Sector funds offer the opportunity for sharp capital gains in cases where
the fund's industry is "in favor" but also entail the risk of capital losses
when the industry is out of favor.
While sector funds restrict holdings to a particular industry, other specialty
funds such as index funds give investors a broadly-diversified portfolio
and attempt to mirror the performance of various market averages. Index
funds generally buy shares in all the companies composing the S&P 500 Stock
Index or other broad stock market indices.
Asset allocation funds move funds among a variety of markets and instruments
in response to the fund manager's view of relative market prospects. They
are broadly diversified and sometimes have higher management fees since
there may be a variety of securities in the portfolio. These funds are suitable
for investors who can tolerate a moderate to high degree of risk, are seeking
capital appreciation and to whom dividend income is secondary in importance.
And whatever the instruments, social responsibility funds apply moral and
ethical as well as economic principles in the selection of securities. |
| Suitable
for: |
Specialty funds are suitable for investors seeking to invest in a particular
industry who can monitor industry performance regularly and alter investment
strategies accordingly. Investors must be willing to assume the risk of
potential loss in value of their investment in the hope of achieving substantial
gains. They are not suitable for investors who must conserve their principal
or maximize current income. |
Previous Page Back to Basics Main Next Page
|
