Most investment companies are funds, including mutual (open-end) funds, closed-end funds, and exchange-traded funds (ETFs). A fund’s “type” is based on its investment objective and the kinds of securities it holds. Some types are easy to recognize, while others are easiest to learn through memorization.
These are the primary types to know:
A growth fund seeks capital appreciation (buy low, sell high). It typically invests in growth-focused common stocks. It may also hold convertible preferred stock and bonds because the ability to convert into common stock creates potential for capital gains.
Aggressive growth funds are still growth funds, but they take on more risk. They invest in common stock with higher return potential, often including small- and micro-cap stocks and companies in volatile or emerging industries.
Real world examples
Growth and income funds seek capital appreciation, but they also aim to generate income. They do this by investing in income-producing common and preferred stocks. Virtually all preferred stocks have a fixed dividend rate, but only larger, well-established companies (e.g., Walmart, Coca-Cola, Procter & Gamble) commonly pay dividends on their common stock.
Dividend-paying stocks are generally less risky than growth-focused common stocks. To pay consistent dividends, a company usually needs consistent profits. Many growth stock issuers are unprofitable or have volatile revenues, so they’re less likely to pay steady dividends. Because of that, a fund that allocates part of its portfolio to dividend-paying stocks is typically more conservative (less risky) than a pure growth fund.
Real world example
Balanced funds are similar to growth and income funds, but they aim for a relatively even mix of:
A key distinction:
Don’t mix these two up.
Real world example
Income funds invest only in income-producing securities. They’re generally more conservative and less risky than growth-focused funds, largely because common stocks can be highly volatile as business conditions and the overall economy change. If a company has a poor year or the economy enters a recession, common stock investors can experience significant losses.
Income funds commonly hold bonds, preferred stocks, and dividend-paying common stocks.
For these reasons, investors can often reduce the chance of significant losses by holding a diversified portfolio of income-producing investments (though this isn’t always true).
Different types of income funds include corporate bond funds, municipal bond funds, and US Government bond funds, which invest in the securities of those issuer types. There are also high yield bond funds, which invest in riskier “junk” bonds with sizeable yields. Conversely, conservative bond funds invest in investment-grade bonds with lower levels of risk and yield. International bond funds invest in bonds from foreign companies and governments.
Investors can also find Ginnie Mae, Fannie Mae, and Freddie Mac funds. These are the federal agencies that purchase mortgages from financial institutions. Investors receive income from interest and principal mortgage payments. Although subject to prepayment and extension risk, Ginnie Mae, Fannie Mae, and Freddie Mac funds are suitable for risk-averse investors seeking conservative investments due to the government backing of agency securities.
Money market funds are also a type of income fund, but they generally pay small amounts of income. As a reminder, money markets are fixed income securities with one year or less to maturity. Many investors use money market funds similarly to bank savings accounts. When an investor holds cash in a brokerage account, it’s typically invested in a money market fund.
Money market funds are:
Investors can reinvest dividends to buy additional $1.00 shares or take the payment as cash. These funds are very liquid (easy to sell), provide a small amount of income, and are suitable for investors with short-term time horizons.
Real world examples
Specialized funds aren’t defined by “growth” or “income.” Instead, they invest only in securities from a specific industry or region, so their risk and return potential can vary widely. Funds that focus on a particular industry are sometimes called sector funds.
Real world examples
Index funds aim to give investors the same return as a specific index.
An index is a list of securities designed to track and average the values of the securities on that list. A well-known example is the S&P 500, which is often used as a shorthand for “the market.” The S&P 500 is a list of 500 large company stocks traded in the United States. Investors use indexes to gauge broad market trends. When the S&P 500 is up, it’s often taken as a sign that the overall market is moving upward.
Indexes come in many forms:
Investment management is often described in two broad styles:
Passive management through vehicles like index funds is becoming very popular in the market. We’ll discuss more about this investing style later in this unit.
Real world examples
Asset allocation funds invest across asset classes (such as stocks and bonds) according to a stated strategy.
Some asset allocation funds keep a constant mix, like Fidelity’s Asset Manager 70% Fund, which invests 70% of portfolio assets in stocks and the remaining 30% in long- and short-term debt securities.
Other asset allocation funds change their mix based on expected market performance or fund requirements. Life cycle funds, also called target date funds, use a changing allocation designed to align with an investor’s timeline. They typically start out more aggressive (heavier in growth stocks). Over time, they become more conservative by shifting assets into safer fixed-income securities. The idea is straightforward: as an investor gets older, they generally take on less risk.
A common example is the Vanguard Target Retirement 2050 Fund, which was created for investors targeting retirement around the year 2050. The fund is aggressive today, with roughly 90% of assets in stocks, but it will shift more toward bonds and other fixed income securities over time.
Real world examples:
As the names suggest, international and global funds invest outside the United States.
These funds can add diversification and may help hedge against domestic risks.
Real world examples:
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