Also known as equity funds, these funds invest primarily in the shares of publicly traded companies. There are numerous types of stock funds.
A blend fund, sometimes known as a core fund, invests across all levels of companies -- small, mid-size and large -- and unless indicated otherwise, across both growth companies and value companies.
Small-cap, midcap and large-cap funds invest only in companies that fit those definitions, which are based on the market "capitalization," or total stock value, of the companies they invest in.
Growth funds stick to companies with potential for better-than-average profit growth, while value funds stick to companies with a low stock price relative to their earnings or such measures.
Investors should note that each fund family and each fund manager has his or her own definition of a "value" or "growth" stock, a small-cap stock and what is an acceptable level of ownership of a certain asset class to meet a fund's category.
Investors should check the fund's prospectus and Fund Profiles found on CBS MarketWatch before deciding on a fund.
BOND FUNDS
Bond funds invest primarily in the debt instruments of companies and governments. They make money both by selling bonds at a profit and through income from the coupon payments of the bonds they hold. These coupon payments also are distributed to shareholders, thus generating income in addition to potential capital gains.
Bond funds tend to be less volatile than stock funds, though there are several types of bond funds, some riskier than others. Junk bond funds, also known as high-yield bond funds, invest primarily in corporate bonds rated below what's considered "investment grade" by the major ratings agencies, Moody's and Standard & Poor's.
Municipal (or muni) bond funds invest in debt sold by U.S. cities, counties and states, while government bond funds invest mostly in U.S. Treasury bonds. Likewise, international bond funds invest in non-U.S. government and corporate debt. Investors should note that bond funds tend to go up in value when interest rates decline, and vice-versa.
BALANCED FUNDS
Balanced funds, also called hybrid funds, hold a mixture of stocks and bonds, and typically also a small amount of cash or money-market instruments.
MONEY MARKET FUNDS
Invest in short-term, interest-bearing securities. Money market funds are generally less risky than either stock funds or bond funds. The fund industry's trade association, Investment Company Institute, says "money market funds are most appropriate for short-term investment and savings goals or in situations where you seek to preserve the value of your investment while still earning income." Money market funds are designed to trade at a constant $1 a share.
INDEX FUNDS
Index funds can be either bond funds or stock funds. They invest in companies that make up a given index, such as the S&P 500 or the Nasdaq 100, in an attempt to mimic the returns of that index. Their advantage to shareholders is that they usually have lower costs than managed mutual funds because index funds do not have to hire staffs of research analysts and money managers to pick their stocks. Most also come without load fees.
SECTOR FUNDS
Stock mutual funds that invest in a specific industry sector, such as technology, health care, or energy. Sector funds are usually much more volatile than general equity funds, because sectors of the economy tend to go in and out of favor among investors, often for reasons that confound the average investor. However, they can also generate higher returns, such as the triple-digit performance of dozens of tech funds during 1999.
GLOBAL & INTERNATIONAL FUNDS
They sound like the same thing, but they're not. International funds invest solely in companies based outside the U.S., while global funds can invest in both U.S. and foreign companies. It's an important distinction, because if you're picking such funds to diversify your U.S. portfolio, a global fund might have some overlapping investments to your existing domestic funds.
CLOSED-END FUNDS
These are technically not mutual funds, although many investors consider them as such and they’re often compared with mutual funds as investment alternatives. Closed-end funds differ from open-end (mutual) funds in that they issue a set number of shares and are usually listed on exchanges, like stocks.
Like mutual funds, they invest in the stock of a number of different companies, but unlike mutual funds they do not issue and redeem new shares. Because the share prices are dictated by the market, they often trade at discounts, and in some cases premiums, to their net asset value.
EXCHANGE TRADED FUNDS
These too are not mutual funds but are often compared with them for investment purposes. Exchange-traded funds are, as their name suggests, traded on stock exchanges. Most represent shares in the companies that make up a recognized index.
The first such fund, Standard & Poor's Depository Receipts (SPY), commonly referred to as a SPiDeR, launched in 1996. At the end of April 2001, the ETF industry had grown to nearly $76 billion in assets spread across 114 funds.
Their increasing popularity among investors stems from certain advantages over mutual funds. They're priced throughout the day, options can be written on them, they can be sold short, and they have no minimum investment amount beyond the price of the individual share.
The ETF structure is also considered more tax-efficient than mutual funds because they limit the exposure to capital gains distributions that can occur when fund managers are forced to sell securities to meet redemptions.
Some of them also have lower expense ratios and better tax efficiency than comparable mutual funds. However, unlike mutual funds, investors must pay transaction fees to brokers when they purchase exchange-traded funds, which can be especially costly for investors looking to put a set amount of money in them each month.
Currently, ETFs only mimic specific indexes. But plans are underway to introduce actively managed exchange-traded products. The Securities and Exchange Commission plans to publish a "concept release" on the subject this summer.
Tags: mutual fund, stock fund, hedge fund, etf, index fund
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