This is a two part series. Please click here for part 1! There are many types of mutual funds with a wide variety of investment objectives and risk and return characteristics. Below is an overview of fund categories listed from higher risk/return potential to lower.
- Aggressive Growth Equity Funds attempt to invest in securities whose stock prices will increase over time (capital appreciation). Often times fund managers invest in companies with the potential for rapid-growth companies in emerging industries or small but rapidly expanding businesses. These funds entail more risk and short-term price volatility than other types of funds, but they may also offer the potential for higher long-term returns than other types of funds.
- Sector Funds focus on a particular industry or sector in the pursuit of capital appreciation. Individual sector funds may invest in oil companies, municipal bonds or automotive stocks for example. Since sector funds concentrate on a single sector, they are less diversified than other funds, placing shareholders at risk if there is a downturn in the specific sector invested in.
- Overseas Equity Funds seek to obtain capital appreciation by investing in stocks of companies outside the United States. Overseas Equity Funds may invest in a particular country, region or specific business sectors located in other regions of the world. Investing overseas can be more risky than domestic equities, with additional risks including foreign currency fluctuations and geopolitical risks.
- Domestic Growth Funds pursue capital appreciation by investing in companies that are perceived to have stronger than average growth potential. Generally speaking, growth funds have less short-term price fluctuation than aggressive growth funds, in part, because they invest in more stable companies. They are typically more risky than growth and income stock funds.
- Growth and Income Stock Funds differ from purely Growth funds in that they invest for both capital appreciation and dividend income to be distributed to shareholders. Some of these funds are weighted more toward providing dividend income and others toward growth. Typically, Growth and Income Stock Funds have less price volatility and risk than pure growth funds, but more than Domestic Growth Funds.
- Balanced Funds pursue capital appreciation by investing in both stocks and bonds. Many people consider Balanced Funds a more conservative investment than stock-only funds, as they offer the diversification inherent in mixing stock and bond holdings.
- Taxable Bond Funds are often sought by investors seeking current income rather than capital appreciation as their investment objective. The risk/reward characteristics of Taxable Bond Funds are determined by the bonds purchased by the funds and vary greatly. A more aggressive bond fund investor may favor high yield or “junk bonds” issued by corporations, with less than investment grade investment ratings that pay a higher interest rate to compensate for the added risk; while a more conservative investor may choose a fund comprised of government or high-grade corporate bonds.
- Tax-Exempt Bond Funds are designed to provide tax-free income by investing in bonds issued by government municipalities. The risk in these bond funds correlates to the credit rating of the issuing government body. Even though they are classified as “Tax-Exempt” funds, income received from these funds may be subject to the alternative minimum tax.
- Money Market Funds pursue current income by investing in short-term money market instruments, such as U.S. Treasury bills, certificates of deposits and commercial corporate notes. Money Market Funds are designed to maintain a stable share price of $1 and are widely considered the least risky mutual funds. It is important to keep in mind that there is no guarantee these funds will be able to maintain a stable $1 per share price, and they are not insured or guaranteed by the U.S. government.
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