Understanding Mutual Funds

Key Takeaway

One way to cushion investment risk is to have a well-diversified portfolio; but without a sizable sum of money to invest, you may not be able to hold a large enough mix of stocks, bonds, and cash to give your portfolio the variety it needs. Mutual funds pool investors’ money to buy stocks, bonds, short-term investments, and other securities or assets. A fund may invest in only one asset class or in a combination of two or more classes. Browse through these brief descriptions of a few common fund types to see which ones match your objectives.

Growth funds buy stocks of companies with the potential for increasing in value.

Aggressive growth funds invest in higher risk companies positioned for sudden rapid growth.

Growth and income funds generally hold stocks of established companies and look for modest growth and high dividend earnings.

International funds buy foreign — or a mix of foreign and domestic — securities. The risks of investing internationally include changes in currency rates, foreign taxation, differences in auditing and financial standards, and other risks.

Sector funds invest in companies in a specific industry, such as pharmaceuticals, technology, etc. They may be subject to greater volatility than funds that invest more broadly.

Value funds invest in stocks of companies whose stock prices are undervalued in the expectation that prices may rise in time.

Corporate bond funds usually buy bonds issued by companies with the goal of generating income.

Municipal bond funds buy bonds issued by states or localities. Income is generally exempt from federal taxes.

High-yield funds invest in low-rated or unrated “junk bonds” that may produce high income but have a greater likelihood of default.

Income funds hold investments that generate current income. They may be stock or bond funds, or balanced funds that invest in both.