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Characteristics, Uses and Taxation of Investments - Investment Objectives


ii. Investment Objectives: planners select funds to match the objectives of their client. Below are the major categories.


    1. Types of Mutual Funds
      1. Growth Funds - these invest in the common stock of growing companies which tend to reinvest most of their dividends into growing their business. Such funds focus on the generation of capital gains as opposed to income. Such funds may pursue stocks in the small-, mid- or large capitalization categories.
      2. Value Funds - such funds seek out stocks whose value is temporarily depressed due to a short-term temporary event. The objective of a value strategy is to purchase underpriced securities and benefit from a catalytic event that unlocks their value. The risk lies in the fact that the mispriced security may experience an additional decline in value. This phenomenon is known as a value trap. Such funds may pursue stocks in the small-, mid- or large capitalization categories.
      3. Core Funds - these types of mutual funds may share features of both value and growth funds. Some may pursue growth stocks that are reasonably priced according to the manager's criteria (GARP or growth-at-a-reasonable-price). Such funds may pursue stocks in the small-, mid- or large capitalization categories.
      4. Income Funds - these focus on generating income rather than capital gains. They may invest in companies with a long and rich history of dividend payments such as utilities and blue chip stocks or they may invest in preferred stocks and government and corporate bonds. Therefore, income funds could either be stock or bond funds.
      5. Specialized or Sector Funds: these funds concentrate in specific economic sectors or industries. Precious metals, technology stocks and retail company funds are examples. The fund could focus on equities or fixed income.
      6. Special Situation Funds: these involve strategies designed to take advantage of a unique set of circumstances that the manager believes would benefit the securities in which the fund has taken a position. Corporate actions such as spin-offs, mergers and acquisitions, tender offers and recapitalizations are all examples of such strategies.
      7. Foreign Stock Funds: these may focus on developed or developing (emerging) foreign markets. Within those markets, they may pursue a strategy somewhere along the continuum of value, core or growth and may focus on a particular market capitalization. Such funds bear exchange and political risk in addition the usual risks associated with mutual funds.
      8. Combination (Growth and Income) Funds: these invest in growth stocks with typically low dividend payouts and income producing investments, be they dividend-rich stocks or investment grade bonds.
      9. Balanced Funds: these pursue a similar objective to that of a combination fund, but the manager adheres to a target asset allocation, such as maintaining a ratio of sixty percent equity and forty percent fixed income. The manager would purchase and sell assets to maintain this ratio.
      10. Target-Dated Retirement (Age Based) Funds: such funds allocate asset classes (principally equities, fixed income and cash) according to the investor's time horizon. A longer dated fund (e.g. 2050) would have a much higher allocation to equities than one with fewer years left to its goal where the majority of assets would be allocated to fixed income and cash. Common to all of these funds is the gradual shift from equities to fixed income to cash as the target date approaches. In this respect, they are managed much like a defined benefit plan, the goal of which is to satisfy investors' liabilities. Do not confuse these with balanced funds, the allocation of which is fixed and which are rebalanced. By contrast, target-dated funds shift their allocation toward bonds and cash over time.
      11. Bond Funds: the goal of bond funds is to generate income. They may be tax-free or taxable.
        1. Tax Exempt: invest in municipal bonds that generate income exempt from federal income tax. The style of management may vary according to the manager's view of the market which influences the portfolio's duration.
        2. Taxable: these may invest in US government and agency securities or (non) investment grade corporate bonds.
      12. Money Market Funds: these invest in highly liquid short-term debt such as commercial paper, banker's acceptances and treasury bills. The average portfolio maturity often does not exceed ninety days. They are purchased and redeemed at $1 a share net asset value. They are usually offered on a no-load basis.
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