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Marc A. Hebert's Money Sense: Navigating the many categories of mutual funds

By MARC A. HEBERT
August 18. 2018 6:55PM




New to mutual fund investing? Given the number of mutual funds available it can be overwhelming to select the ones that are best suited for your portfolio. Understanding the different fund categories can be a good first step.

Understanding fund types means understanding what stocks and bonds are. Stocks or shares of stock represent an ownership in the corporation. Bonds are a form of debt in which the issuing corporation promises to pay regular income and the principal amount at a specific date.

. Global and international funds invest in foreign stocks and bonds. The global funds may buy a mix of U.S. and foreign stocks. Imagine a globe when thinking of these funds. Whereas global funds may hold U.S. stocks, international funds invest exclusively overseas. Investors can further divide the category into regional and country funds. These can take advantage of specific investment opportunities such as in emerging markets. Risk in this category varies and can include such factors as higher taxation, less liquidity, political instability, and currency fluctuations due to the foreign nature of the investments.

. Aggressive growth funds are equity funds that try to maximize capital gains. These funds invest in companies with the potential for rapid growth. They can be very volatile in the short term, but long term they may offer the potential for above-average capital appreciation.

. Growth funds also strive for capital gain appreciation and invest in companies that are positioned for strong earnings growth. These funds hold stocks of companies that are expected to grow at a rate faster in relation to the overall stock market. Risk varies, but in general they are less risky than aggressive growth funds because they normally invest in well-established companies. There may also be less potential for capital appreciation.

. Growth and income funds seek both dividend income and capital appreciation. They typically choose companies with solid records of dividend payments and capital gains. Growth and income funds may be less risky and less volatile than pure growth funds, but may also offer less potential for capital appreciation.

. Sector funds can concentrate on one industry, such as technology, financial services, or consumer goods. They may also focus on certain commodities such as gold, gas, or oil. As sector funds are less diversified they are often more volatile.

. Balanced funds combine stocks and bonds in a single fund. They earn the name "balanced" by keeping the balance between the two asset classes steady. Due to this inclusion of both stocks and bonds they may be suitable for people with a small amount of cash to invest.

. Bond funds invest solely in bonds. They can be divided into four broad categories: tax exempt, taxable, high quality, and high yield. Within these categories, funds are also segmented by maturity date, type of issuer, and credit quality of bonds they invest in. Depending on the nature of the investment, these funds have varying degrees of interest rate, inflation, and credit risk.

. Allocation/lifestyle and target-date funds may be another option for investors looking to simplify their choices. Allocation or lifestyle funds invest in a fixed mix of stocks, bonds, and money markets based on a particular risk profile. Target-date funds also invest in a mix of asset classes but that mix changes over time as the investor approaches the target date, typically the expected date of retirement. For example, a 2040 fund might feature a mix of stocks and bonds that gets progressively more conservative as you approach year 2040 and beyond.

Remember that the mutual fund categories that will best meet your investment needs will depend on a number of factors, including your goals, investment time horizon, and your tolerance for risk.

Marc A. Hebert, MS, CFP, is a senior member and president of the wealth management and financial planning firm The Harbor Group of Bedford. Email questions to Marc at mhebert@harborgroup.com. Your question and his response might appear in a future column.


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