With thousands of mutual funds available, choosing which ones to include in your portfolio is a tricky business. But once you have some understanding of the different fund categories, you’ll be better prepared to devise an appropriate investment strategy.
Categories for Different Equity
Equity mutual funds boil down to five large groups: Aggressive growth funds are among the most risky equity funds. Aimed at maximum capital appreciation, they invest in companies with the potential for rapid growth. Growth funds also strive for capital appreciation by investing in companies positioned for strong earnings growth. In general, they are slightly less risky than aggressive growth funds.
Growth and income funds strive for both dividend income and capital appreciation. Balanced funds offer one-stop shopping by combining stocks and bonds in a single portfolio. Sector funds concentrate on one industry such as technology, or focus on certain commodities such as gold.
There’s More on the Menu
Bond funds can be divided into four broad categories: tax-exempt, taxable, high-quality, and high-yield. Tax-exempt funds buy bonds issued by state and municipal agencies, while taxable funds may invest in all other debt securities.* High-quality funds stick to government and top-rated corporate or municipal bonds, while high-yield funds buy lower-rated corporate or municipal bonds.
In addition, there are money market funds, which invest in highly liquid short-term money market instruments, such as U.S. Treasury bills. These funds may be most appropriate for short-term goals, such as a down payment on a home, since they’re among the least risky investments you can choose.** There are also global and international funds, which can help you to diversify your portfolio among a wide array of foreign stocks and bonds. Keep in mind, however, that international investments may involve greater risks that don’t apply to domestic investments, including currency risk and political uncertainty.
Understanding mutual fund categories is only the first step toward mutual fund investing. The next step is to match your goals, time frame, and risk tolerance to appropriate fund categories.
*Some tax-exempt fund holdings may be subject to the federal alternative minimum tax. Capital gains, if any, are taxable for federal and, in most cases, state purposes.
**An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corp. or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share it is possible to lose money by investing in the fund.
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