Types of Mutual Funds
Investors can invest in stock funds, bond funds, money market
funds, hybrid funds, and commodity funds. Table 14–2 shows the
different types of equity fund classifications based on investment
objectives.
A stock mutual fund specializes in stock investments. Stock
funds vary with regard to the types of stocks the funds choose for
their portfolios and are guided by the fund’s investment objectives.
The Securities and Exchange Commission (SEC) requires that funds
disclose their objectives. For example, a fund might have the objective
to seek growth through maximum capital gains. This type of
fund then would appeal to more aggressive investors who can withstand
the risk of loss because of the speculative nature of the stocks
of the unseasoned, small companies in which the fund invests.
A conservative equity fund’s objectives are geared more
toward providing current income than capital growth. This type of
fund invests in dividend-paying stocks, which also would provide
for capital appreciation, even though that might not be a primary
objective. Growth and income funds seek a balance between providing
capital gains and providing current income.
Equity funds also can be classified according to investment
style, namely, growth stocks or value stocks or a blend of the two.
Value stocks have financial characteristics different from growth
stocks. Value stocks generally pay dividends and have low
price/earnings (P/E) ratios, whereas growth stocks have high P/E
ratios, and the companies tend to have high sales growth rates for
a specified period.
Investing in equity funds does not immunize you from the
volatility in the markets. In a market downturn, the more speculative
stocks in the funds’ portfolios generally decline more than
established blue-chip stocks. Share prices of aggressive funds are
therefore much more volatile than share prices of conservative stock
funds.
Table 14-2
Types of Equity Mutual Funds
| Fund Type |
Objectives |
| Aggressive growth |
Seek maximum capital gains; invest in stocks of companies
in new industries and out-of-favor companies. |
| Growth |
Seek an increase in value through capital gains; invest in
stocks of growth companies and industries that are more
mainstream than those chosen by aggressive growth funds. |
| Growth and income |
Seek an increase in value through capital gains and
dividend income; invest in stocks of companies with a
more consistent track record than companies selected for
growth and aggressive growth funds. |
| Income equity |
Invest in stocks of companies that pay dividends. |
| Index |
Invest in securities that replicate the market, for example,
Standard & Poor’s (S&P) 500 Index, Dow Jones Industrial
Average (DJIA). |
| International equity |
Invest in stocks of companies outside the United States. |
| Global equity |
Invest in stocks of companies both inside and outside the
United States. |
| Emerging market |
Invest in stocks of companies in developing countries. |
| Sector |
Invest in stocks in the sector of the economy stated in
the fund’s objectives, for example, energy, health care
sector, technology, and precious metals. |
| Balanced |
Seek to provide value through income and principal
conservation; invest in common stocks, preferred stocks,
and bonds. |
| Asset allocation |
Invest in securities (stocks, bonds, and money market)
according to either a fixed or variable formula. |
| Hedge |
Invest in securities (stocks and bonds) and derivative
securities to hedge against downturns in the market,
interest-rate changes, and changes in currency
values. |
An index fund is a mutual fund that includes a portfolio of
securities designed to match the performance of the market as a
whole. An index fund tracks an underlying market index and seeks
to match the returns of that particular market index. For example,
the S&P 500 Index Fund invests in the stocks of the S&P 500 Index.
This strategy does not require active management of the assets in
the fund because turnover is low. The stocks are held in the fund
until they drop out of the index. Only then are changes made to the
fund. The enthusiasm for index funds has spurred growth into
other areas, such as mid-cap and small-cap stocks, emerging
markets, Europe, Asia, and the Pacific Rim.
A combined stock and bond fund is called a balanced fund.
Balanced funds invest in a mixture of stocks and bonds. The equity
portion of a fund aims to provide capital growth, and the fixedincome
investments provide income for shareholders. The range of
percentages allocated to stocks and bonds are stated in the prospectus
of the fund.
Generally, the riskier the securities held in a fund, the greater
is the potential return and the greater is the potential loss. This
statement is true for all types of funds, including stock funds.
Much has been written about hedge funds since the disaster at
Long Term Capital Management, a Connecticut hedge fund that had
to be bailed out by 14 financial institutions. Long Term Capital
Management suffered heavy losses in its positions on Russian bonds
because of adverse swings in the prices in the currency markets. Yet,
in 2001, the Dow Jones Total Market Index of U.S. stocks declined by
12 percent, whereas hedge funds gained 4.4 percent, as measured by
the CSFB/Tremont Index (Clements, 2002, p. C1). Table 14–3 defines
hedge funds and lists some of their characteristics.
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