Fund Categories

The vast majority of mutual funds are open-end funds, meaning there is no predetermined limit on the number of shares the fund can issue. The more money investors put into the fund, the larger it grows, and the more shares it issues. The price of each share is based on its net asset value (NAV). You can liquidate your shares at any time.

Closed-end funds offer a fixed number of shares. Once sold, these shares are usually publicly traded on the nation’s stock exchanges and cannot usually be redeemed by the fund company. The value of shares is determined by supply-and-demand forces of the marketplace, as well as by the value of the fund portfolio.

There are thousands of funds in the marketplace today, so how do you narrow the choices? Start by identifying the type of fund you might need. Most funds fall into at least one of the following categories:

Money market funds are typically invested in short-term instruments, including CDs and treasury bills and bonds. They offer the lowest potential for return but they also offer the least risk.

Generally, money market funds are appropriate for investors who want to stay out of the market for a time or for individuals who might need the money in a short time and want to avoid greater risk. Money market funds are typically offered at $1.00 per share.

An investment in a Money Market Portfolio is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in a Money Market Portfolio.

Bond funds are also called fixed-income funds . These funds are typically invested in government and/or corporate bonds. Funds that are invested in state or local government bonds may offer some income that is exempt from income tax. Corporate bond funds may be invested in bonds from companies across the country or around the world. In general, funds holding bonds with longer average maturity periods have both higher yield and higher risk than funds with a shorter average maturity. Bonds, and therefore bond funds, are highly sensitive to interest rate fluctuations. Typically, bond funds are considered low-to moderate-risk investments, with a few in the high-risk category.

Independent agencies such as Standard & Poor’s and Moody’s rate bonds in the marketplace according to default risk. While scales differ, ratings generally run from AAA (high quality) down to C (lowest quality) or D (in default). Examine the ratings of the bonds in any fund you are considering for investment.

Stock funds, also called equity funds , are usually invested in various publicly traded stocks. Risk levels vary. Some of the more common stock funds include:

• Index funds : These funds attempt to mirror the performance of stock market indexes, such as the Dow Jones Industrial Average or the Standard & Poor’s 500 Composite Stock Price Index (S&P 500). The S&P 500 is comprised of 500 blue chip stocks and is widely considered the benchmark against which stock mutual fund portfolio managers compare their performance. The Dow tracks the movement of 30 of the largest blue chip stocks traded on the New York Stock Exchange. Although you can’t invest directly in an index, these funds generally invest in the same stocks tracked by one of these indexes and, consequently, closely match the performance of that index. Investing in an index fund reduces the risk that a portfolio manager will make poor investment decisions. Also, since these funds require little management and a lower turnover rate, both fees and capital gains distributions are lower. The downside to these funds is that they’re managed for average performance, so they rarely perform significantly better than the market in general.
• Growth and income funds are generally comprised of investments in companies with a solid dividend payment record (to provide income) that are believed to have growth potential. The earnings of these companies, and therefore their values, are expected to increase. Growth and income fund investments span a broad range of industries. These funds are designed to help you hedge your bets — even if the share price falls, your loss may be offset by dividends. Growth and income funds fall in the middle of the risk spectrum for stock funds.
• Growth funds usually invest in companies believed to have better than average growth potential. The earnings of these companies, and therefore the values of their stocks, are expected to increase. These funds are invested in a broad range of industries. Growth funds are considered higher risk than growth and income funds. Expect significant fluctuation in share price.
• Value funds are funds that invest in undervalued stocks and wait for the market to recognize their value. Fund managers generally select undervalued stocks from several market sectors. These funds are for long-term investment; it may take years for value funds to realize their worth. Value funds have both high-risk and high-return potential.
• Balanced funds are invested in both stocks and bonds. Compared to stock-only funds, these funds provide diversification with potentially lower risk as well as potentially lower returns.
• International funds are invested in stocks or bonds of non-U.S. companies. Included in this group are global funds, which invest in both domestic and international markets, in one or more sectors. Investors in these funds are taking on a high degree of risk, since funds’ holdings can be affected by political unrest or currency devaluation in a foreign country. Often, international funds are invested in companies from countries that are considered emerging markets, where business is rapidly developing (e.g., Latin America). The potential risks are very high, as are the potential rewards.
• Specialty or sector funds are invested in a specific market sector such as utilities or health care stocks, or in specific commodities such as gold or natural gas. Because they are so limited in scope, the risks can be very high.