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Categories of Mutual Funds
Mutual funds come in many different flavors, each offering something different to help meet the investor's objectives. Mutual Fund investors select a fund with an investment objective that most closely matches their own goals. For example, capital growth, preservation of capital, and income are some popular objectives. Before choosing a mutual fund, it is recommended that you clarify your financial goals. You may be saving for your children's college education, to build a new house, or for your own retirement.
Mutual funds fall into three main categories, with sub-categories by investment objective:
Equity (stock) Funds - Funds that invest primarily in stocks. The actual portfolio holdings, trading style, portfolio turnover, etc. will vary widely depending on the fund's investment objectives and the manager's style.
Aggressive Growth - Also called Capital Appreciation Funds. Have an investment objective of maximum capital gains, with minimal or no concern for dividends or income. These funds tend to be some of the most volatile, with share price rises that can be thrilling and drops that can be frightening. Not only do the portfolio holdings themselves tend to be volatile, but many aggressive growth funds magnify the volatility by using borrowed money (leverage) to increase the size of the positions held. Some funds in this category also deal in stock options and futures contracts. Small Company Growth Funds fall into the aggressive growth area.
Aggressive growth funds purchase shares of stock in smaller companies which have a chance to grow at a faster pace than more "mature" companies. Of course, there is also greater risk involved with investing in less established companies.
Aggressive growth funds are usually recommended for the investors who seek long term capital appreciation and will not need access to that money for at least ten years.
Balanced - Funds invest in a mix of common stocks and corporate bonds. The weighting of each piece of the mix depends on the fund manager's perceptions of where the markets and economy are going. Some preferred stocks and convertible securities are commonly allowed, as are cash equivalents such as Treasury Bills, CDs, and commercial paper.
Global Similar to International, but with the option of investing anywhere globally, including the U.S.
Growth The goal for these funds is long-term growth of capital. Growth funds own shares of medium to large companies, and could include such familiar "blue chip" names as IBM and General Electric. Normally, these established companies will grow at a moderate pace, and will pay regular dividends to owners of its shares. If a mutual fund is the owner, the fund will collect these dividends and pass them to mutual fund shareholders once or more per year. While capital appreciation is the major objective of this type of fund, income derived from dividends is a secondary objective. Investments are typically in long-growth stocks, with a lower portfolio turnover than the aggressive growth funds. Dividend yields tend to be low.
Growth and Income Despite the name, funds in this category are typically more interested in growth than income, with typical dividend rates on the portfolios in the 1% range. The usual portfolio is blue chip stocks, with some income enhancing securities like convertible preferred stocks or bonds thrown into the mix.
Index Unlike traditional stock funds, which are managed actively by a portfolio manager based on analysis of economic and market movements, index funds are passively managed. A passively managed fund buys and holds securities selected to represent its unmanaged target index, such as the Standard & Poor's 500 Index.
International The goal is similar to regular growth funds, but the portfolio holding are made up of non-U.S. equities, with an occasional foreign bond holding due to an unusually high yield or foreign currency play. Specific region funds such as Asia-Pacific funds fall in this area.
Sector Concentrates investments on a narrow market sector like health care, Internet stocks, biotechnology, and so on. Sector funds tend to be volatile as industry groups fall into and out of favor, portfolios are diversified only within an industry group.
Specialized Concentrates investments in a particular area or industry. Not as narrowly focused as sector funds. Examples would be precious metals funds, utilities funds and individual foreign country funds.
Bond Funds Funds which are intended to produce regular income. Bond funds differ from actual bonds in that funds have no stated maturity date and no promise of principal payment on a certain date. The investment objective is almost always high current income and preservation of capital. The exceptions to this statement are: 1) convertible bond funds, which are managed more like an equity fund; 2) zero coupon or "target" funds, which invest in noninterest bearing securities that mature in a specific target year; and 3) high yield (junk bond) funds, where preservation of capital is not a high priority.
Investors should note that bond funds do not mature as individual bonds or unit trusts do. They fluctuate in price with interest rates, and an investor who redeems shares when interest rates are rising may receive a lower net asset value than that which was invested.
Corporate Bond Typically contains investment grade corporate bonds; generally longer term (20-30 year maturities); higher yields than government and mortgage-backed bonds.
Short-term Corporate Bond - Investment grade bonds nearing maturity, usually 2 to 4 years; goal is higher yield than money market funds without the volatility associated with longer term bond funds.
Convertible Bond - More equity oriented, with correspondingly higher return potential than typical bond funds; investments generally medium grade (Baa-BBB) corporate convertible bonds and preferred stocks; less current yield than comparable regular bond funds but with a potential equity upside.
GNMA Funds - Safety of principal and higher yields than those typical of U.S. government funds; sometimes include mortgage-backed securities of other agencies, for example FNMA and FHLMC.
Government Bonds - Stress safety and reliable income; dividends largely free from state and local taxes; management techniques may sometimes include hedging or option writing.
High Yield - Can be a euphemism for junk bond funds; invests in high risk investments with a goal of equity-like returns. Preservation of capital is a low priority, some positions may be very illiquid.
Municipal Bonds (tax-free) - Like municipal Unit Investment Trusts (UITs), portfolio is managed in an attempt to increase return. Municipal funds come in many varieties - single state, AAA-AA only, insured issues only, revenue bonds only, etc.
Tax-free investments can help you:
- Lower your tax bill.
- Generate investment income.
- Manage your investment portfolio's volatility
International Bonds - Usually hold investment grade foreign bonds, both corporate and sovereign issues; take advantage of higher than domestic U.S. yields caused by currency and economic disparities; generally lose competitive edge over domestic bond funds in periods of strong U.S. dollar.
Money Market Funds - Funds that are open-ended and invest in commercial paper, banker's acceptances, repurchase agreements, government securities, certificates of deposit, and othe highly liquid and safe securities.
Categories of Mutual Funds
Mutual funds come in many different flavors, each offering something different to help meet the investor's objectives. Mutual Fund investors select a fund with an investment objective that most closely matches their own goals. For example, capital growth, preservation of capital, and income are some popular objectives. Before choosing a mutual fund, it is recommended that you clarify your financial goals. You may be saving for your children's college education, to build a new house, or for your own retirement.
Mutual funds fall into three main categories, with sub-categories by investment objective:
Equity (stock) Funds - Funds that invest primarily in stocks. The actual portfolio holdings, trading style, portfolio turnover, etc. will vary widely depending on the fund's investment objectives and the manager's style.
Aggressive Growth - Also called Capital Appreciation Funds. Have an investment objective of maximum capital gains, with minimal or no concern for dividends or income. These funds tend to be some of the most volatile, with share price rises that can be thrilling and drops that can be frightening. Not only do the portfolio holdings themselves tend to be volatile, but many aggressive growth funds magnify the volatility by using borrowed money (leverage) to increase the size of the positions held. Some funds in this category also deal in stock options and futures contracts. Small Company Growth Funds fall into the aggressive growth area.
Aggressive growth funds purchase shares of stock in smaller companies which have a chance to grow at a faster pace than more "mature" companies. Of course, there is also greater risk involved with investing in less established companies.
Aggressive growth funds are usually recommended for the investors who seek long term capital appreciation and will not need access to that money for at least ten years.
Balanced - Funds invest in a mix of common stocks and corporate bonds. The weighting of each piece of the mix depends on the fund manager's perceptions of where the markets and economy are going. Some preferred stocks and convertible securities are commonly allowed, as are cash equivalents such as Treasury Bills, CDs, and commercial paper.
Global Similar to International, but with the option of investing anywhere globally, including the U.S.
Growth The goal for these funds is long-term growth of capital. Growth funds own shares of medium to large companies, and could include such familiar "blue chip" names as IBM and General Electric. Normally, these established companies will grow at a moderate pace, and will pay regular dividends to owners of its shares. If a mutual fund is the owner, the fund will collect these dividends and pass them to mutual fund shareholders once or more per year. While capital appreciation is the major objective of this type of fund, income derived from dividends is a secondary objective. Investments are typically in long-growth stocks, with a lower portfolio turnover than the aggressive growth funds. Dividend yields tend to be low.
Growth and Income Despite the name, funds in this category are typically more interested in growth than income, with typical dividend rates on the portfolios in the 1% range. The usual portfolio is blue chip stocks, with some income enhancing securities like convertible preferred stocks or bonds thrown into the mix.
Index Unlike traditional stock funds, which are managed actively by a portfolio manager based on analysis of economic and market movements, index funds are passively managed. A passively managed fund buys and holds securities selected to represent its unmanaged target index, such as the Standard & Poor's 500 Index.
International The goal is similar to regular growth funds, but the portfolio holding are made up of non-U.S. equities, with an occasional foreign bond holding due to an unusually high yield or foreign currency play. Specific region funds such as Asia-Pacific funds fall in this area.
Sector Concentrates investments on a narrow market sector like health care, Internet stocks, biotechnology, and so on. Sector funds tend to be volatile as industry groups fall into and out of favor, portfolios are diversified only within an industry group.
Specialized Concentrates investments in a particular area or industry. Not as narrowly focused as sector funds. Examples would be precious metals funds, utilities funds and individual foreign country funds.
Bond Funds Funds which are intended to produce regular income. Bond funds differ from actual bonds in that funds have no stated maturity date and no promise of principal payment on a certain date. The investment objective is almost always high current income and preservation of capital. The exceptions to this statement are: 1) convertible bond funds, which are managed more like an equity fund; 2) zero coupon or "target" funds, which invest in noninterest bearing securities that mature in a specific target year; and 3) high yield (junk bond) funds, where preservation of capital is not a high priority.
Investors should note that bond funds do not mature as individual bonds or unit trusts do. They fluctuate in price with interest rates, and an investor who redeems shares when interest rates are rising may receive a lower net asset value than that which was invested.
Corporate Bond Typically contains investment grade corporate bonds; generally longer term (20-30 year maturities); higher yields than government and mortgage-backed bonds.
Short-term Corporate Bond - Investment grade bonds nearing maturity, usually 2 to 4 years; goal is higher yield than money market funds without the volatility associated with longer term bond funds.
Convertible Bond - More equity oriented, with correspondingly higher return potential than typical bond funds; investments generally medium grade (Baa-BBB) corporate convertible bonds and preferred stocks; less current yield than comparable regular bond funds but with a potential equity upside.
GNMA Funds - Safety of principal and higher yields than those typical of U.S. government funds; sometimes include mortgage-backed securities of other agencies, for example FNMA and FHLMC.
Government Bonds - Stress safety and reliable income; dividends largely free from state and local taxes; management techniques may sometimes include hedging or option writing.
High Yield - Can be a euphemism for junk bond funds; invests in high risk investments with a goal of equity-like returns. Preservation of capital is a low priority, some positions may be very illiquid.
Municipal Bonds (tax-free) - Like municipal Unit Investment Trusts (UITs), portfolio is managed in an attempt to increase return. Municipal funds come in many varieties - single state, AAA-AA only, insured issues only, revenue bonds only, etc.
Tax-free investments can help you:
- Lower your tax bill.
- Generate investment income.
- Manage your investment portfolio's volatility
International Bonds - Usually hold investment grade foreign bonds, both corporate and sovereign issues; take advantage of higher than domestic U.S. yields caused by currency and economic disparities; generally lose competitive edge over domestic bond funds in periods of strong U.S. dollar.
Money Market Funds - Funds that are open-ended and invest in commercial paper, banker's acceptances, repurchase agreements, government securities, certificates of deposit, and othe highly liquid and safe securities.
Important Notice: Performance data for the Mutal Fund Mall is provided by Morningstar, Inc., an independent firm that tracks the investment industry. Although gathered from reliable resources, Morningstar cannot guarantee completeness and accuracy. Fund information and data includes sales charges or transaction fees and assume reinvestment of dividends and capital gains at net asset value.
A free prospectus for mutual funds containing more complete information, including management fees and other expenses, in available upon request. Funds are offered by prospectus only. As with any investment, you should always carefully read the prospectus and make sure you understand it fully. Investigate before you invest is always good investment practice.
National Financial Services LLC provides recordkeeping and shareholder services for shares purchased and/or held in accounts. NetVest receives remuneration from participating fund companies for NTF funds.
Returns will vary and shares may be worth more or less than their original cost when sold. This and other information on mutual funds is provided for general informational purposes only. Also remember that market volatility can significantly impact short-term performance. Results of an investment made today may differ substantially from the historical performance shown.
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