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Key Points

» Categories for Different Needs
» Choose Funds That Match Your Goals
» Watch Your Basket
» Evaluating Mutual Fund Performance
» Points to remember

With more than 8,000 mutual funds available today, according to a
2008 Investment Company Institute report, selecting the most
suitable ones for your portfolio is a tricky business. Overwhelmed
by the sheer number of funds, new investors understandably may be
confused. People invest in mutual funds mainly because they
don’t have time to examine thousands of individual securities,
yet selecting specific mutual funds isn’t any easier.

True, picking the right funds will take some time. But once you
have some understanding of the different fund categories —
which determine the kinds of securities that fund managers select
for their funds — the industry’s messy and seemingly
endless differentiation will clarify itself. You can then devise a
mutual fund investment strategy that will work for you, bearing in
mind your time horizon and ability to withstand fluctuations in the
value of your portfolio.

ategories for Different Needs

Despite the fund industry’s endless differentiation, equity
mutual funds boil down to five large groups: aggressive growth
funds, growth funds, growth and income funds, balanced funds, and
sector funds. Besides those, there are also categories of bond
funds, money market funds, and global and international

  • Aggressive growth and
    small-cap funds are among the most aggressive equity
    funds. Aimed at maximizing capital gains, these funds invest in
    companies with the potential for rapid growth (companies in
    developing industries, small but fast-moving companies, or
    companies that have fallen on hard times but appear due for a
    turnaround). Some aggressive growth funds use several investment
    strategies — which may include options and futures — in
    an effort to achieve superior returns. These funds can be very
    volatile in the short term, but in the long run they may offer the
    potential for above-average capital appreciation. Aggressive growth
    funds are generally more suitable for long-term investors with a
    time horizon of 10 years or longer.
  • Growth funds also strive for
    capital appreciation by investing in companies that are positioned
    for strong earnings growth. Funds in this group vary widely in the
    amount of risk they take. But in general, they are less risky than
    aggressive growth funds because they normally invest in
    well-established companies. Growth funds may entail less volatility
    than aggressive growth funds, but also less potential for capital
    appreciation. Neither aggressive growth funds nor growth funds
    strive for dividend income. In fact, the companies they invest in
    often do not pay dividends to their shareholders, but reinvest the
    earnings to fuel future growth.
  • Growth and income funds strive for
    both dividend income and capital appreciation by investing in
    companies with solid records of dividend payments and capital
    gains. Some growth and income funds emphasize growth while others
    emphasize income. Growth and income funds may be less risky and
    less volatile than pure growth funds but may also offer less
    potential for capital appreciation.
  • Balanced funds offer one-stop
    shopping by combining stocks and bonds in a single portfolio.
    Balanced funds are more conservative than the previously discussed
    categories and usually invest in blue-chip stocks and high-quality
    taxable bonds. They may potentially hold up better in rough
    markets, because when their stock investments fall, their bonds may
    do well, and vice versa. Because they offer diversification,
    balanced funds are often suitable for people with a small amount of
    cash to invest.
  • Sector funds concentrate on one
    industry (such as technology, financial services, or consumer
    goods) or focus on certain commodities (such as gold, gas, or oil).
    Selected by more experienced investors who are willing to pay close
    attention to the market, sector funds are less diversified than the
    broader market and hence are often more volatile.
  • Bond funds can be divided into four
    broad categories: tax-exempt, taxable, high quality, and high
    yield. Within these categories, funds are also segmented by
    maturities, type of issuer, and credit quality of bonds in which
    they invest. Tax-exempt bond funds buy bonds issued by state
    and municipal agencies, while taxable bond funds may invest
    in all other debt securities. High-quality bond funds stick
    with government and top-rated corporate or municipal bonds that
    offer relatively lower interest. High-yield bond funds buy
    lower-rated or non-investment grade corporate or municipal bonds,
    or “junk bonds,” which offer higher interest to compensate for the
    higher risks that investors take. While bond funds in general are
    less risky than stock funds, the return on principal is not
    guaranteed and bond funds have the same interest rate, inflation,
    and credit risks that are associated with the underlying bonds
    owned by the fund.
  • Money market funds invest in
    short-term money market instruments, such as U.S. Treasury bills,
    commercial paper, certificates of deposit, and repurchase
    agreements. Striving to maintain a stable share price of $1, money
    market funds offer maximum safety and liquidity, as well as a yield
    that’s generally higher than that of bank deposits, which
    unlike money market funds, are FDIC-insured.1
  • Global and international
    can help diversify your assets into a wide array of
    foreign stocks and bonds. The difference between the two groups is
    that global funds may buy a mix of U.S. and foreign stocks, whereas
    international funds invest exclusively overseas. Under the two fund
    groups, there are regional funds and country funds
    designed to take advantage of specific investment opportunities in
    the world’s developed and emerging countries. In terms of risk
    ratio, global and international funds vary widely from lower-risk
    funds that invest in established markets to higher-risk emerging
    funds. Be aware that international securities may face
    additional risks, such as higher taxation, less liquidity,
    political problems, and currency fluctuations, that do not affect
    domestic securities.
  • Asset allocation funds may be
    another option for investors looking to simplify their choices.
    They generally invest in a mix of stocks, bonds, and money markets
    based on a particular time horizon. For example, there may be a
    fund targeted to investors with a 20-year goal and one for
    investors with a 30-year goal.


Choose Funds That
Match Your Goals
  • Equities
  • Aggressive Growth
  • Small Cap
  • Sector
  • Growth
  • Asset Allocation
  • Growth and Income
  • Balanced
  • Global
  • International
  • Emerging Market
  • Country/Regional
  • Fixed Income
  • High Yield
  • Mortgage Backed
  • Government Agency
  • Long-Term Government
  • Long-Term Corporate
  • Tax-Exempt
  • Short-Term Bond
  • Money Market
  • Tax-Exempt Money Market
  • International Bond


Watch Your Basket

The adage “Don’t put all your eggs in one basket” applies to
mutual funds as much as any other type of investment. By investing
in only one fund category, you may subject your assets to an undue
amount of risk. One way to help minimize risk is to practice
diversification, or spreading your assets among a variety of funds
within different categories.2

Evaluating Mutual Fund
1 Year 3 Years 5 Years 10 Years
Large-Cap Growth -40.67% -10.28% -3.37% -2.46%
Mid-Cap Growth -43.77% -10.92% -2.44% 0.79%
Small-Cap Growth -41.55% -11.35% -3.52% 1.51%
Large-Cap Value -37.09% -8.92% -1.79% 0.90%
Mid-Cap Value -36.77% -9.93% -1.07% 5.23%
Small-Cap Value -32.24% -9.63% -0.97% 5.51%
Taxable Fixed Income (Long) -3.72% 0.38% 1.48% 3.94%
Taxable Fixed Income (Short) -4.23% 0.96% 1.23% 3.38%
Money Market 2.00% 3.67% 2.87% 3.04%
Foreign (Developed) -43.99% -7.67% 1.21% 0.90%
Emerging Market -54.44% -6.38% 6.13% 8.74%
This table shows the performance achieved by various mutual fund
categories over the past 1-, 3-, 5-, and 10-year time periods ended
December 31, 2008.

Source: Morningstar. Based on the average total returns of all
funds tracked by Morningstar within a category. Performance shown
is for illustrative purposes only and is not indicative of the
performance of any specific investment. Past performance does not
guarantee future results. Does not take taxes, brokerage fees, or
sales charged into account.

Understanding mutual fund categories is only the first step in
mutual fund investing. The next step is to match your goals, time
frame, and risk tolerance to appropriate fund categories.

Points to Remember


  1. Mutual fund categories determine the types of securities that
    mutual fund managers select for their funds.
  2. Some equity fund categories are aggressive growth, growth,
    growth and income, balanced, sector, global, and
  3. Bond funds include taxable and tax-exempt funds and are also
    segmented by maturity, issuer, and credit quality.
  4. Investors should match their objectives to a particular
    category but be cautious about focusing too heavily in any one
  5. Diversifying among funds is one way to help minimize risk in
    your portfolio.

1An investment in a money market fund is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any
other government agency. Although the fund seeks to preserve the
value of your investment at $1.00 per share, it is possible to lose
money by investing in the fund.

2Diversification does not ensure against loss.

P© 2010 Standard & Poor’s Financial Communications. All
rights reserved.