What Types of Mutual Funds Are
There?
There are many ways to categorize mutual funds. The most common way is by
their objective. Moist mutual funds pursue either growth of capital, income, or some
combination of the two. Any and all could have a place in a diversified portfolio.
Which funds you invest in largely depend on your tolerance to risk, your investment
time horizon (i.e.: when will you need the money), your current income needs, and tax
strategy. The main types of funds are as follows:
GROWTH FUND
A growth Fund typically invest in stocks of companies with the greatest potential
for long term growth. Such investments could include companies in fast growing
industries such as technology and health care, or they could include stocks of well
established companies. While growth funds are subject to the daily ups and downs of the
stock market, their long term potential can be substantial.
AGGRESSIVE GROWTH FUND
Aggressive growth funds choose investment policies and strategies that
pursue maximum growth. They may invest in smaller companies that have the potential
to be much larger over time. Or...they may focus on emerging markets like Asia,
Latin America and eastern Europe. These investments can be very risky an are not
suitable for all investors. However, a well diversified mutual funds can help reduce
the risk and provide the opportunity for superior long term returns.
INCOME FUND
Income funds invest primarily in bonds or other income producing securities (i.e.:
stocks that pay dividends). They may seek either current income or income over an
extended time period. This income may be paid our on a monthly, quarterly or
semiannual basis and can be taxable or non taxable depending on the securities the fund
invests in. Usually the share price of this fund is more stable than a growth
fund.
TAXABLE INCOME FUND
Taxable income funds invest primarily in corporate bonds or dividend paying stocks. The income they produce is usually subject to federal and state income taxes.
TAX EXEMPT INCOME FUND
A tax-exempt income fund invests in municipal securities issued by state and local governments, subdivisions and authorities. The interest from these securities in exempt from federal income taxes, and, depending upon the state they are issued and where you reside, state an local income taxes.
The interest rates offered by tax exempt bonds are usually less than the rate of taxable bonds. That is because you get to keep more of the income on a tax exempt bond (i.e.: you don't have to use any of it to pay taxes). The net difference between the two returns depends on your tax bracket. The higher your tax bracket, the more desirable tax-exempt income becomes. However, for investors subject to the alternative minimum tax, tax-exempt income may be subject to income taxes. Also, capital gains distributions from tax-exempt funds are subject to capital gains taxes as well as appreciation on the share price once you sell the fund.
GROWTH AND INCOME FUND
Growth and income funds typically invest in a mix of stocks (for growth)
& bonds or other dividend pay securities (for income). The income may help to
reduce the effect of the short term ups & downs of stocks on the overall value
of your investment
INTERNATIONAL FUNDS
International funds invest in securities issued outside the U.S..
In the past 25 years, the percentage of the world's capital represented by foreign
securities has risen dramatically. According to Morgan Stanley Capital
International, foreign stocks accounted fort nearly two thirds of the world's capital as
of December 1997. Also, as of December 1997, Salomon Brothers reported that more
than 50% of the world's bonds originated overseas. International funds involve
special risks (i.e.: political and economic uncertainties, currency rate fluctuations,
etc..). However, due their large growth potential, it generally makes sense for long
term investors to consider devoting at least part of their investments to funds that hold
foreign securities.
GLOBAL FUNDS
Global Funds invest overseas as well as in the USA. As a
result, global funds may offer more diversification than international funds. This
can help reduce the risks typically associated with investing in foreign securities (i.e.:
political and economic uncertainties, currency rate fluctuations, etc..)
SPECIALTY FUNDS
Specialty Funds may invest in narrowly focused categories (i.e.: precious metals, a
single industry , and industry group, etc..) Because of this concentration, they may
be subject to special risk. However, as a part of a diversified portfolio, a
specialty fund may offset other market risks or offer the opportunity for significant long
term results.
