Chapter 2-3 Types of Funds

Within the main types of mutual funds, there are specific funds with a variety of investment goals that the fund needs to fulfill in the interest of its shareholders.  These are the most popular fund types that you will see:

The first category that we will look at is stock funds.  Included in stock funds are growth funds.  Growth funds invest in stocks that the fund’s manager considers to have the possibility for notable price growth.  Another type of stock fund is a value fund.  Value funds invest in stocks that the fund’s manager considers to be priced lower than fair value in the secondary market.  A third type of stock fund is an equity income fund, which invest in stocks that systematically pay dividends.  Stock index funds are another kind of fund included within stock funds.  They are passively managed funds.  Stock index funds try to reproduce the performance of a particular stock market index by investing in the stocks retained by that index.  The next type of funds included in stock funds are small-cap, mid-cap, or large-cap stock funds.  They invest in companies that are within a specific size spectrum.  Economic periods have a tendency to be partial to companies of varying sizes at different times.  Also included in stock funds are socially responsible funds, which invest in accordance with political, social, religious, or ethical rules.  These rules are explained in the fund’s prospectus.  A lot of socially responsible funds also assume an activist function in the companies that they invest in.  They do this by showing their shareholders’ ethical worries at meetings with company management.  A seventh type of stock fund is a sector fund.  Sector funds concentrate on stocks of specific sectors within the economy.  Even though sector funds are less likely to be as diverse as funds that are spread out over multiple sectors, they do give you a way to take part in a sector of the economy that is performing well without needing to pick out particular companies.  Yet another type of fund that is included within stock funds are international, global, regional, country-specific, or emerging markets fund, which expands their range outside of the United States.  International funds invest entirely in non-U.S. companies.  Global funds invest in the stocks of companies from every part of the world, along with U.S. companies in global businesses.  Regional funds concentrate on the stocks of companies in a specific region of the world such as Latin America, Asia, or Europe.  Country-specific funds restrict their reach to stocks from an individual country.  Emerging market funds invest in the stocks of companies in developing countries.

Another main type of mutual fund is a bond fund.  Included in bond funds are corporate, agency, and municipal bond funds.  These funds concentrate on bonds from a specific kind of issuer, with a variety of different maturities.  Another type of fund included within bond funds is short-term or intermediate-term bond funds.  They concentrate on short-term or intermediate-term bonds from an expansive range of issuers.  A third type of bond fund is a Treasury bond fund, which invest in Treasury issues.  The fourth type of bond fund is a high-yield bond fund.  High-yield bond funds invest in lower-rated bonds with higher coupon rates.

The third category that we are going to look at is balanced funds.  Balanced funds invest in a blend of stocks and bonds to create a portfolio that is varied over both asset classes.  The percentage goals for the specific types of investments are reported in the prospectus.  Since stocks and bonds are inclined to do well in various stages of an economic cycle, balanced funds may be less volatile than either stock or bond funds alone.

Funds of funds are another main type of mutual fund.  Funds of funds invest in other mutual funds.  Because these funds can attain substantially more variety than any individual fund, their returns are influenced by the fees of the fund itself as well as the fees of the intrinsic funds.  One concern may be repetition, which can decrease variety, because numerous intrinsic funds may retain the identical investments.

A fifth main type of mutual fund is a target-date fund, also referred to as a lifecycle fund.  These funds of funds alter their investments as time goes by to satisfy the objectives you set up to achieve at a particular time, such as retirement.  Generally, target-date funds are sold by date, like a 2030 fund.  The more distant the date is, the higher the risk the fund typically endures.  As the target date draws near, the fund shifts its proportion of assets to stress protection of the total it has amassed and to moves in the direction of income-yielding investments.

Another main type of mutual fund is a money market fund.  Money market funds invest in short-term debt, like Treasury bills and very short-term corporate debt, also referred to as commercial paper.  These investments are regarded as cash equivalents.  Money market funds invest with the objective of keeping a share price of $1.  They are at times regarded as a substitute to a bank savings account despite not being insured by the FDIC.  A number of funds have individual insurance.

It is essential to remember that funds do not invest 100 percent of their assets according to the approach alluded to by their established goals all the time.  A number of funds experience what is labeled as a style drift.  This is when the fund manager invests a share of the assets in a group that the fund would normally leave out, for example, the manager of large-cap fund may invest in some mid-cap or small-cap companies.  Fund managers may execute this kind of change to make up for diminishing performance, but it may leave you open to risks you were not ready for.

The SEC has issued guidelines that obligate a mutual fund to invest at least 80 percent of its assets in the type of investment implied by its name.  However, funds can still invest as much as one-fifth of their holdings in additional kinds of assets, including assets that you might regard too risky or possibly not adequately aggressive.  You might want to review the most recent quarterly report explaining the fund’s primary investment holdings to examine how approximate the fund manager is holding on to the approach detailed in the prospectus, which is likely why you invested in the fund.

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