A mutual fund with an income objective invests in securities that pay regular income in dividends or interest. One key to earning a good return is to buy a fund that has low expenses.
Money Market Funds Mutual fund companies and brokerage firms offer money market funds. They invest in highly liquid, relatively safe securities with very short maturities (always less than one year), such as certificates of deposit, government securities, and commercial paper (i.e., short-term obligations issued by corporations). You can write checks or use an ATM card to access a money market fund account. Issuers keep the NAV (the price of each share of the fund) at $1. money market funds (and there are more than 1000 of them) pay a higher rate of return than accounts offered through banks and credit unions. While money market funds are not insured by a federal agency, they are considered extremely safe. Tax-exempt money market funds limit their investments to tax-exempt municipal securities with maturities of less than 90 days. The earnings are tax free to investors. Government securities money market funds appeal to investors’ concerns about safety by investing solely in Treasury bills and other short-term securities backed by the U.S. government.
Money Market Funds Mutual fund companies and brokerage firms offer money market funds. They invest in highly liquid, relatively safe securities with very short maturities (always less than one year), such as certificates of deposit, government securities, and commercial paper (i.e., short-term obligations issued by corporations). You can write checks or use an ATM card to access a money market fund account. Issuers keep the NAV (the price of each share of the fund) at $1. money market funds (and there are more than 1000 of them) pay a higher rate of return than accounts offered through banks and credit unions. While money market funds are not insured by a federal agency, they are considered extremely safe. Tax-exempt money market funds limit their investments to tax-exempt municipal securities with maturities of less than 90 days. The earnings are tax free to investors. Government securities money market funds appeal to investors’ concerns about safety by investing solely in Treasury bills and other short-term securities backed by the U.S. government.
Bond Funds Bond funds (also called fixed-income funds) aim to earn current income higher than a money market fund without incurring undue risk by investing in a portfolio of bonds and other investments, such as preferred stocks and common stocks that pay high dividends. They do not ignore capital gains, however. Bond fund prices fluctuate with changing interest rates. Bond funds are categorized by what they own and the maturities of their portfolio holdings.
- Short-term corporate bond funds invest in securities maturing in 1 to 5 years.
- Short-term U.S. government bond funds invest in Treasury issues maturing in 1 to 5 years.
- Intermediate corporate bond funds invest in investmentgrade corporate securities with 5- to 10-year maturities.
- Intermediate government bond funds invest in Treasurieswith 5- to 10-year maturities.
- Long-term corporate bond funds specialize in investmentgrade securities maturing in 10 to 30 years.
- Long-term U.S. government bond funds invest in Treasury and zero-coupon bonds with maturities of 10 years or longer.
- Mortgage-backed funds invest in mortgage-backed securities issued by agencies of the U.S. government, such as Ginnie Mae (GNMA).
- Junk bond funds invest in high-yield, high-risk corporate bonds
- Municipal bond (tax-exempt) funds invest in municipal bonds that provide tax-free income. Both investment-grade and high-yield municipal bond funds exist.
- Single-state municipal bond funds invest in debt issues of only one state.
- World bond funds invest in debt securities offered by foreign corporations and governments.
Growth Objective
A mutual fund that has a growth objective seeks capital appreciation. It invests in the common stock of companies that have above average growth potential, firms that may not pay a regular dividend but have the potential for large capital gains. Growth funds carry a fair amount of risk exposure, and this is reflected in substantial price volatility. Aggressive growth funds (also known as maximum capital gains funds) seek the greatest long-term capital appreciation. Also known as capital appreciation funds, they make investments in speculative stocks with volatile price swings. They may employ high-risk investment techniques, such as borrowing money for leverage, short selling, hedging, and options. Lots of buying and selling occurs to enhance returns.
Growth funds seek long-term capital appreciation by investing in the common stocks of companies with higher-than-average revenue and earnings growth, often the larger and well-established firms. Such companies (like Wal-Mart, Microsoft, and Coca-Cola) tend to reinvest most of their earnings to facilitate future growth.
Growth and income funds invest in companies that have a high likelihood of both dividend income and price appreciation.
Value funds specialize in stocks that are fundamentally sound and whose prices appear to be low (low P/E ratios), based on the logic that such stocks are currently out of favor and undervalued by the market.
Midcap funds invest in the stocks of midsize companies with a market capitalization of less than $1 billion that are expected to grow rapidly.
Small-cap funds (or small company growth funds) invest in lesser-known companies with a market capitalization of less than $500 million that offer strong potential for growth.
Microcap funds invest in high-risk companies with a market capitalization of less than $300 million.
Sector funds concentrate their investment holdings in one or more industries that make up a targeted part of the economy that is expected to grow, perhaps very rapidly, such as energy, biotechnology, health care, and financial services.
Regional funds invest in securities listed on stock exchanges in a specific region of the world, such as the Pacific Rim, Australia, or Europe. Precious metals and gold funds invest in securities associated with gold, silver, and other precious metals.
Global funds invest in growth stocks of companies listed on foreign exchanges as well as in the United States, usually multinational firms
International funds invest only in foreign stocks throughout the world. Emerging market funds seek out stocks in countries whose economies are small but growing. Fund prices are volatile because these countries tend to be less stable politically.
Growth and Income Objective
A mutual fund that has a combined growth and income objective seeks a balanced return made up of current income and capital gains. Such funds heavily invest in common stocks. They seek a return not as low as offered by funds with an income objective but not as high as that offered by funds with a growth objective. They invite less risk than growth funds.
Growth and income funds invest in companies expected to show average or better growth and pay steady or rising dividends.
Equity-income funds invest in well-known companies with a long history of paying high dividends as they emphasize income and capital preservation.
Socially conscious funds invest in companies that meet some predefined standard of moral and ethical behavior. Criteria could be progressive employee relations, strong records of community involvement, an excellent record on environmental issues, respect for human rights, and safe products (as well as no “sinful” products such as tobacco, guns, alcohol, gambling). See www .socialinvest.org for examples.
Balanced funds (or hybrid funds) keep a set mix of stocks and bonds, often 60 percent stocks and 40 percent bonds, in order to earn a well-balanced return of income and long-term capital gains. Blend funds invest in a combination of stocks and money market securities, but no fixed-income securities, such as bonds.
Asset allocation funds invest in a mix of assets (usually stocks, bonds, and cash equivalents and sometimes international assets, gold, and real estate), and they buy and sell regularly to reduce risk while trying to outperform the market. The asset mix may be based on risk tolerance (aggressive, moderate, and conservative).
Life-cycle funds are asset allocation funds that offer investors premixed portfolios of stocks, bonds, and cash that investors of a certain age and risk tolerance might prefer. These are targeted to people in their 30s, 40s, 50s, 60s, and 70s. They are also known as target retirement funds. Life-cycle funds shift assets from aggressive to moderate to conservative securities as the retirement target approaches. They seek to first grow and then preserve the portfolio assets. This is a no-hassle, “buy-andforget” way to invest.
Mutual fund funds earn a return by investing in other mutual funds. This provides extensive diversification, but expenses and fees are higher than average.
Socially conscious funds invest in companies that meet some predefined standard of moral and ethical behavior. Criteria could be progressive employee relations, strong records of community involvement, an excellent record on environmental issues, respect for human rights, and safe products (as well as no “sinful” products such as tobacco, guns, alcohol, gambling). See www .socialinvest.org for examples.
Balanced funds (or hybrid funds) keep a set mix of stocks and bonds, often 60 percent stocks and 40 percent bonds, in order to earn a well-balanced return of income and long-term capital gains. Blend funds invest in a combination of stocks and money market securities, but no fixed-income securities, such as bonds.
Asset allocation funds invest in a mix of assets (usually stocks, bonds, and cash equivalents and sometimes international assets, gold, and real estate), and they buy and sell regularly to reduce risk while trying to outperform the market. The asset mix may be based on risk tolerance (aggressive, moderate, and conservative).
Life-cycle funds are asset allocation funds that offer investors premixed portfolios of stocks, bonds, and cash that investors of a certain age and risk tolerance might prefer. These are targeted to people in their 30s, 40s, 50s, 60s, and 70s. They are also known as target retirement funds. Life-cycle funds shift assets from aggressive to moderate to conservative securities as the retirement target approaches. They seek to first grow and then preserve the portfolio assets. This is a no-hassle, “buy-andforget” way to invest.
Mutual fund funds earn a return by investing in other mutual funds. This provides extensive diversification, but expenses and fees are higher than average.
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