Mutual funds come in many varieties. There are index funds, stock funds, bond funds, money market funds and more. Each of these may have a different investment objective and strategy and a different investment portfolio and will be discussed in turn, along with its unique risks, volatility, and fees and expenses.
An investment company is required to state its objective in its prospectus, and this objective can only be changed by a majority vote of its shareholders.
There are two primary objectives for any investment: growth or income.
Types of Mutual Fund Portfolios
Where investment companies diverge is in the portfolios they manage in pursuit of those objectives, and the policies governing these portfolios must also be stated in each fund's prospectus. Here are some types of funds broken down by portfolio:
- Municipal bonds: A fund that invests exclusively in munis and passes the federal income tax exemption on to its shareholders. Depending on the policy stated in the prospectus, it may also provide diversity of purpose, geography and maturity.
- Money market: A very secure fund that invests in such short-term instruments as T-bills and bank-issued CDs. Usually, money market funds are also fairly low-yielding, but they become increasingly attractive in times of rapidly rising interest rates.
- Common stock: Strictly speaking, there is no such thing as a "common stock fund" except in the minds of those who sponsor the Series 7 exam. Yes, there are many funds that invest mostly or entirely in common stock, but "common stock" is a very broad category.
These funds each have their own investment objectives and strategies, for example:
- some focus on growth stocks while others focus on income stocks.
- some might define those same objectives in terms of company sector rather than cash flow dynamics - that is, a fund might call itself a "technology fund" rather than a "growth fund" and a "utility fund" rather than an "income fund".
- some might specialize in mixing the shares of the 30 components of the Dow Jones Industrial Average for maximum return and call themselves "blue-chip funds".
- others might want to invest in common shares of non-U.S. companies and refer to themselves as "global funds".
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