International funds invest in companies outside the U.S. They may invest in securities issued by companies that are located in several countries within a particular region of the world, like Europe or Asia, or they may focus on a single country, such as Japan.
International equity funds are managed to provide investors with capital appreciation through equity securities of companies whose primary operations are located outside the U.S. Returns are affected not only by the foreign companies' earnings, but also by currency exchange values and changes in local foreign governments. Investors in international funds should expect higher degrees of risk, along with the appreciation opportunities afforded by these types of funds.
- International bond funds invest in foreign fixed income securities issued by corporations located outside the U.S. They are designed to provide high current income, safety of capital and preservation of value; however, they are subject to market risk and currency exchange risk and are usually more volatile than domestic bond funds.
Global funds are like international funds, only they invest in U.S. companies as well as internationally headquartered corporations. Moreover, global funds have traditionally tended to include a higher proportion of U.S. domestic companies than companies from other countries, whereas international funds do not invest in U.S. companies, as per their statement of objectives.
An index fund invests in securities within a particular benchmark index and according to the specific composition of that index. For instance, a common index fund available to investors is one that mirrors the S&P 500 Index. Investors who buy shares of this particular fund expect that their return will be equivalent to the pooled return of all companies within the S&P 500. Investors usually choose index funds because the expenses associated with managing them are low and they are skeptical of managers who claim they can outperform a particular benchmark over time.
The article, The Lowdown on Index Funds, contains further guidance as to their benefits and performance.
In addition, it is important to recognize that not all index funds are created equally. The article, You Can't Judge an Index Fund by Its Cover contains important advice as to what to watch out for.
Asset Allocation Funds
The asset allocation fund is a relatively new type of mutual fund, where a fund manager allocates a fund's holdings according to the investment style of a characteristic portfolio. For instance, a conservative asset allocation fund might be composed of 60% bonds, 30% stocks and 10% cash or money market instruments, while a moderate growth asset allocation fund could contain 60% stocks, 35% bonds and 5% cash and money market instruments.
Sector and Other Specialized Funds
These funds focus on a particular sector of the economy or invest in a particular market, industry or other situation defined by the objectives of the mutual fund. Some examples include funds that focus on precious metals, real estate, health sciences or companies restructuring from bankruptcy. These funds carry more risk than other mutual funds, as they are less diversified than the funds mentioned above.
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