Mutual Funds

MUTUAL FUNDS
Targeted Investments Mutual funds aim at particular targets. To hit them, the funds make certain types of investments.
Every mutual fund — stock, bond, or money market — is established with a specific investment objective that focuses on one of three basic goals: Future growth Current income Both income and growth To achieve its objective, the fund invests in securities it believes will produce the results it wants. To identify those securities, a fund often does a vast amount of research, often using what's known as a bottom-up style, which involves analyzing individual companies. When the objective is small-company growth or the focus is on emerging markets, the process can be more difficult because there's limited information readily available. In addition, each fund manager has a buying style, seeking a particular type of investment from the pool that may be appropriate for the objective. Some equity-fund managers, for example, stress value, which means buying stocks whose prices are lower than might be expected. Other managers may be contrarians, buying investments that others are shunning. THE RISK FACTOR There is always the risk that a fund won't hit its target. And some funds are, by definition, riskier than others. For example, a fund that invests in small new companies takes the chance that some of its investments will do poorly because it believes that some, at least, will do very well. In contrast, other funds work to moderate risk by balancing their investments between stocks and bonds. FUNDS TAKE AIM These charts group funds in three basic categories by investment objective. They also illustrate the correlation between a fund's objective and the risks it may face.
INCOME FUNDS Kind of fund Investment objective Potential risks What the fund buys Agency bond Income and regular return of capital Value and return dependent on interest rates Securities issued by US government-sponsored agencies and related institutions Corporate bond Steady income Interest-rate changes and inflation Highly rated corporate bonds, with various maturities High-yield bond Highest current income High-risk bonds in danger of default Low-rated and unrated corporate government bonds International and money market Income and currency gains Changes in currency values and interest rates CDs and short-term securities Municipal bond Tax-free income Interest-rate changes and inflation Municipal bonds in various maturities Short-/ intermediate-term debt Income Small risk of loss. Less influenced by changes in interest rate Different types of debt issues with varying maturities, depending on type of fund US Treasury bond Steady income Interest-rate changes and inflation Highly rated government bonds
GROWTH AND INCOME FUNDS Kind of fund Investment objective Potential risks What the fund buys Balanced Income and growth Limited risk to principal. Moderate long-term growth Part stocks and preferred stocks (usually 60%), and part bonds (40%) Equity income Income and growth Limited risk to principal. Moderate long-term growth Blue chip stocks and utilities that pay high dividends Growth and income Growth plus some current income Limited risk to principal. Moderate long-term growth Stocks that pay high dividends and show good growth Income Primarily income Limited risk of loss to principal, but less growth in strong market Primarily bonds, but some dividend-paying stocks
GROWTH FUNDS Kind of fund Investment objective Potential risks What the fund buys Aggressive growth funds, also called capital appreciation Long-term growth Very volatile and speculative. Risk of above-average losses to get above-average gains Stocks of new or undervalued companies expected to increase in value Emerging markets Growth Typically more volatile than other growth funds Stock in companies in developing countries Equity index Imitate the stock market Average gains and losses for the market the index tracks Stocks represented in the index the fund tracks Global equity Global growth Gains and losses depend on stock prices and forex fluctuations. Some risk to principal Stocks in various markets Growth Above-average growth Can be volatile. Some risk of loss to principal to get higher gains Stocks in mid-sized or large companies whose earnings are expected to rise quickly International equity International growth Potentially volatile, based on currency fluctuation and political instability Stocks in non-US companies Sector Growth Volatile funds dependent on right market timing to produce results Stocks in one particular industry, such as energy or transportation Small company growth Long-term growth Volatile and speculative. Risk of above-average losses to get higher gains Stocks in small companies traded on the exchanges or over the counter Value funds Growth Often out of step with overall market Stocks in companies whose prices are lower than they seem to be worth
HEDGING International fund managers may use a practice called hedging to protect the return on their funds. That's because if a currency gains value in relation to others, investments denominated, or sold, in those other currencies have less value when they are converted into the stronger currency. To protect against losses that could result from that situation, mutual funds often buy futures contracts on a currency at preset exchange rates. Funds that hedge may put up to 50% of their total assets in currency contracts rather than stocks or bonds. But other funds don't hedge at all, figuring that exposure to other currencies is part of the reason for investing overseas.