|
 |
|
Mutual Funds
Types of Mutual Funds |
Once you understand the risks and rewards of
investing in mutual funds and how they affect your financial goals, you should review the
types of funds that exist. There are three basic types of mutual funds: stock funds,
fixed-income funds, and specialty funds. Each fund has a different investment objective
and strategy -- normally listed in your fund's prospectus.
Stock Funds
- Growth Funds. Consist of common stocks that have a potential for growth
and capital appreciation. Dividend or interest income is secondary. Fund managers
generally invest in stocks of well-established and stable companies that are expected to
increase in value. Companies may be small, mid, large-cap, or a combination of all three.
Growth funds incur a high degree of risk in exchange for a potentially higher rate of
return -- they are not as risky as aggressive growth funds. Best suited for long-term
investments.
- Aggressive Growth Funds. Consist of common stocks that have a high
potential for accelerated growth and capital appreciation. Fund managers generally invest
in stocks of high-risk companies, small companies, and start-up or emerging growth
companies. Aggressive growth funds incur a higher degree of risk than growth funds -- in
exchange for a potentially higher rate of return. Best suited for long-term investments.
- Value Funds. Consist of common stocks considered
"undervalued" -- stocks whose prices have dropped significantly or are simply
out of favor with the market. Fund managers invest in value stocks because they anticipate
a renewed interest in the company (followed by a subsequent price reversal) or a
"turnaround" -- the company takes measures to get back on track (layoffs, etc.).
Value funds are speculative and incur a high degree of risk -- in exchange for a
potentially higher rate of return. Best suited for small to mid-term investments.
- Growth and Income Funds. Also known as "equity-income funds".
Consist of common stocks that seek capital appreciation and dividend income -- dividends
paid to shareholders on a quarterly basis. Fund managers generally invest in stocks of
well-established companies that are expected to increase in value and have a solid record
of paying dividends. Income may be derived from other fixed income securities such as
corporate bonds or money market instruments. Growth and Income funds incur a low to
moderate degree of risk in exchange for moderate growth and consistent income. Best suited
for investors who have a long-term investment horizon but still require current income.
- Sector Funds. Consist of common stocks that belong to a specific
industry or sector of the economy. Examples are real estate (REITs), technology, health
care, utilities, precious metals (gold, silver, etc.), communications, or finance. Fund
managers generally invest in stocks that make up the core of the selected industry. Sector
funds incur a higher degree of risk in exchange for a potentially higher rate of return --
they are riskier than other types of stock funds. Best suited for investors who are
speculative about market conditions and are willing to accept a very high degree of risk
-- and give up the diversification that mutual funds normally offer. Higher fees and
turnover ratios.
- International/Global Funds. International funds consist of stocks
outside the United States while Global funds consist of both foreign and U.S. stocks.
These funds are usually the easiest way for investors to participate in overseas markets.
Fund managers invest in stocks based on a number of criteria: local interest rates,
currency trends, earnings growth, or other favorable conditions. Overseas funds incur a
very high degree of risk because of international uncertainties (exchange rate
fluctuations or other economic conditions) -- they are riskier than aggressive growth
funds but offer a higher potential reward. Best suited for long-term investments and as
part of an asset allocation strategy.
MORE »
|
