Types of Mutual Funds
Mutual funds are classified by their investment objectives and the types of securities they hold. Understanding these categories helps match funds to investor needs.
Classification by Investment Objective
Growth Funds
Growth funds invest in stocks of companies expected to grow faster than the market. Key features:
- Focus on capital appreciation
- Reinvest earnings rather than pay dividends
- Higher risk/reward than income funds
- Suitable for long-term investors who can tolerate volatility
Income Funds
Income funds prioritize regular income over capital appreciation:
- Invest in dividend-paying stocks and/or bonds
- Lower volatility than growth funds
- Suitable for investors seeking current income (e.g., retirees)
Growth and Income Funds
Growth and income funds (balanced/hybrid) seek both appreciation and income:
- Diversified across stocks and bonds
- Moderate risk profile
- Suitable for investors seeking balance
Classification by Asset Type
Stock (Equity) Funds
| Type | Investment Focus | Risk Level |
|---|---|---|
| Large-Cap | Large, established companies | Moderate |
| Mid-Cap | Medium-sized companies | Moderate-High |
| Small-Cap | Smaller companies | High |
| Value | Undervalued stocks | Moderate |
| Growth | High-growth potential stocks | High |
| Blend | Mix of value and growth | Moderate |
| Sector | Specific industry (tech, healthcare) | High |
| International | Non-U.S. companies | Moderate-High |
| Global | U.S. and international companies | Moderate-High |
Bond (Fixed-Income) Funds
| Type | Investment Focus | Risk Level |
|---|---|---|
| Government | U.S. Treasury securities | Low |
| Corporate | Investment-grade corporate bonds | Moderate |
| High-Yield | Below investment-grade ("junk") bonds | High |
| Municipal | State/local government bonds (tax-exempt) | Low-Moderate |
| GNMA (Ginnie Mae) | Government-backed mortgage securities | Low |
Money Market Funds
Money market funds invest in short-term, high-quality debt instruments:
- Treasury bills, commercial paper, CDs
- Seek to maintain stable $1.00 NAV
- Very low risk, very low return
- High liquidity
- Not FDIC insured (despite low risk)
Specialized Fund Types
Index Funds
Index funds track a specific market index (S&P 500, Dow Jones, etc.):
- Passive management (no active stock picking)
- Lower expense ratios than actively managed funds
- Returns mirror the index (minus expenses)
Target-Date Funds
Target-date funds (lifecycle funds) automatically adjust asset allocation over time:
- Named for target retirement year (e.g., "2040 Fund")
- Start aggressive (more stocks) when target is far away
- Gradually become conservative (more bonds) as target approaches
- "Set it and forget it" approach
Sector Funds
Sector funds concentrate in a specific industry:
- Technology, healthcare, energy, financial services, etc.
- Less diversified than broad market funds
- Higher risk due to concentration
- Suitable for investors with strong sector views
Fund Objectives and Policies
Every mutual fund has a stated investment objective disclosed in its prospectus. The fund manager must invest according to this objective. Common objectives include:
- Capital appreciation
- Current income
- Tax-exempt income
- Capital preservation
- Total return
Exam Tip: Match fund types to investor objectives. Growth funds for long-term appreciation, income funds for current income, money market funds for safety and liquidity.
Which type of mutual fund would be MOST suitable for a retiree seeking regular monthly income?
What is a key characteristic of index funds?
A target-date 2040 fund is designed for an investor who plans to retire around 2040. How will the fund's asset allocation change over time?
2.3 Share Classes and Sales Charges
Continue learning