Types of Mutual Funds

There are basically three broad categories of mutual funds: those whose goal is to provide immediate income, those oriented toward long-term growth or capital appreciation, and those offering both. The individual fund's objective will be stated at the beginning of its prospectus. Of the literally thousands of variations of mutual funds, here are just a few:

• Equity Funds - Stock funds emphasize growth, with dividend payouts typically being low. These funds stress capital appreciation rather than immediate income.
• Bond Funds - The key advantage of bond funds, in contrast to individual bond issues, is that the funds pay income at least monthly with reinvestment possible at the current yield of the fund. A bond fund is always replacing bonds in its portfolio, thereby, actively managing the average maturity of the bonds. In this way, the manager is able to control the risk and reward of the portfolio, as well as the amount of income that it generates. The two main risks associated with bond funds are market risk if interest rates should rise (because bond prices would likely decline), and credit risk if the quality of the borrowers declines.
• Growth - A growth mutual fund is typically defined as one that invests in companies that are exceeding the growth of the economy. Investors look for companies and industries with a strong growth trend in sales and earnings. Growth companies and growth mutual funds can cover all capitalization ranges: large-cap growth (large high growth companies with an average capitalization of approximately $7 billion or greater); mid-cap growth. An investment strategy that invests in stocks of (mid-sized companies with an average capitalization of between $2 billion and $7 billion); and small-cap growth (companies with an average capitalization of less than $2 billion).
• Value - Value stocks often have low book-to-market ratios, which means the stock is trading at a low price compared with its book value (the company's assets on a balance sheet, less its liabilities, generally figured on a cost-per-share basis). In addition, their price/earnings ratio is generally lower and, as such, is considered to be less volatile and risky. As with growth stocks, value stocks can cover all capitalization ranges.
• Diversified International Blend Funds - These funds shift investments across countries and underlying stocks between growth and value.
• Diversified Emerging Market - Their investments are focused on those economies which are still developing and growing. These represent some of the most volatile funds.
• International Growth - Their focus is on stocks of high-growth international companies.
• International Value - The focus of these funds is on stocks of undervalued companies worldwide.
• Balanced Funds - A balanced mutual fund includes two or more asset classes other than cash; typically, equities and fixed-income securities in varying percentages. It stresses three main goals: income, capital appreciation, and preservation of capital. This type of fund balances holdings such as bonds, convertible securities, and preferred- as well as common stock. The mix varies depending on the fund manager's view of the economy and market conditions.
• Fixed-Income Funds - The objectives of fixed-income funds are safety and income, rather than capital appreciation. Income conservative funds invest in bonds of all types, including corporate and government bonds, government-insured mortgages, and municipals.