1. Introduction
2. Investment vehicle characteristics
2.1 Equity
2.2 Fixed income
2.3 Pooled investments
2.3.1 Investment companies
2.3.2 Mutual funds
2.3.3 Closed-end funds
2.3.4 Unit investment trusts (UITs)
2.3.5 Exchange traded funds (ETFs)
2.3.6 Types of funds
2.3.7 Real estate investment trusts (REITs)
2.3.8 Tax implications
2.3.9 Suitability
2.4 Derivatives
2.5 Alternative investments
2.6 Insurance
2.7 Other assets
3. Recommendations & strategies
4. Economic factors & business information
5. Laws & regulations
6. Wrapping up
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2.3.6 Types of funds
Achievable Series 66
2. Investment vehicle characteristics
2.3. Pooled investments

Types of funds

We’ve already learned about the characteristics of mutual funds, closed-end funds, and exchange-traded funds (ETFs). Now, we’ll focus on various fund types, which are largely dependent on the fund’s investment goals and the types of securities it invests in. Some will be easy to distinguish and others may require some memorization. Regardless, let’s go through the common types of funds to better understand the choices investors have when choosing funds.

Growth funds

A growth fund is a fund that seeks to attain capital appreciation. That’s a fancy way of saying buy securities low and sell them high. Growth funds most often invest in common stock due to their potential for capital gains, Convertible preferred stock and convertible bonds may also be included (their convertibility into common stock provides the potential for capital appreciation).


Sometimes funds can be classified by the size of the companies they invest in. Market capitalization is the easiest way to measure the size of a company, which is found by multiplying a company’s outstanding shares by their market value.

Growth funds are especially known to determine their investments based on a company’s size. For example, a small-cap growth fund invests exclusively in smaller companies.

While knowing each market capitalization category isn’t heavily tested on the Series 66 exam, here are the four categories:

Large cap

  • More than $10 billion


  • $2 billion - $10 billion


  • $300 million - $2 billion


  • Less than $300 million

Generally speaking, the smaller the company, the more risk and growth potential. When a small company performs well in a good economy, it has a large potential for growth. On the other hand, smaller companies are the first to go bankrupt when things go bad.

You’ll want to keep this idea in mind when approaching test questions. Large-cap funds are made up primarily of large, well-established companies. While large-cap growth funds are still subject to moderate risk, they’re not as aggressive or volatile as small-cap growth funds.

Aggressive growth funds

Aggressive growth funds are also growth funds, but with more risk involved. This type of fund invests in common stock that provides a higher potential for return, including stock of small-cap (smaller) companies and companies from volatile or emerging industries.

Growth & income funds

Growth and income funds, sometimes referred to as blend funds, also focus on attaining capital appreciation, but additionally invest in income-producing stocks, which includes preferred and common stock. Virtually all preferred stocks have a fixed dividend rate, but only larger and well-established companies like Walmart pay dividends on their common stock. Stocks that provide dividend income are generally less risky than growth-focused common stock; in order to pay consistent dividends, the company must make consistent profits. Therefore, this type of fund is more conservative than pure growth funds.

Low risk
High risk

Balanced funds

Balanced funds are similar to growth and income, but balanced funds seek a fairly even distribution between growth-focused common stock and income-producing securities, which include bonds. Balanced funds invest in bonds and stock, whereas growth and income funds only invest in stock. Don’t get the two mixed up!

Income funds

Income funds only invest in income-producing securities, which include bonds, preferred stock, and common stocks that pay regular dividends. Capital appreciation (growth) is not a focus for these funds as they aim to only provide their investors with consistent interest and dividend income. Income funds are generally more conservative and less risky than growth funds.

Why are growth funds riskier than income funds? It’s due to price volatility in the stock market. The stock market is unpredictable and prices can move in a variety of directions depending on business activity and general economic conditions. If a company has a rough year or the economy is going through a recession, it’s not uncommon for investors to lose significant amounts of money on their common stock.

Income investments include bonds, preferred stock, and common stock. Bond issuers are legally required to pay interest, and bondholders generally don’t see significant fluctuations in their bond values unless interest rates change considerably. Although dividend payments from preferred stock are not legal obligations, issuers rarely miss their dividend payments unless the company is facing significant financial troubles.

Larger, well-established companies with a long track record of profits frequently pay cash dividends to their common stockholders. Even in tough economic environments, these investments tend to maintain most of their value. Generally speaking, investors can largely avoid volatility and significant losses with income-producing investments.

Different types of income funds include corporate bond funds, municipal bond funds, and US Government bond funds, which invest in those types of issuers. There are also high yield bond funds, which invest in riskier “junk” bonds with high yields. Conversely, there are conservative bond funds that 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. If you recall, these agencies that purchase mortgages from banks to make it easier for Americans to purchase real estate. Investors receive income originating from interest paid on mortgages. 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.

Asset allocation funds

Asset allocation funds do exactly what their name suggests; they invest in specific asset classes depending on various factors. For example, an asset allocation may currently hold a 60% stock, 40% bond mix. Some asset allocation funds maintain a constant asset mix, like the Fidelity’s Asset Manager 70% Fund, which invests 70% of portfolio assets in stocks, with the remaining 30% invested in long and short term debt securities.

Some asset allocation funds shift their structures around due to expected market performance or because of fund requirements. Life cycle funds, also known as target date funds, have changing allocations and are meant to “follow along” an investor’s lifetime. They start out more aggressive when originally issued, investing primarily in growth stocks. As time passes, the fund becomes more conservative by shifting more assets into safer fixed-income securities. This enforces good investment practices; the older an investor is, the less risk they should expose themselves to. A good example is the Fidelity Freedom 2050 Fund, which was created for investors targeting retirement around the year 2050. The fund is aggressive right now with over 90% of the assets invested in stocks, but the allocation will shift more to bonds and other fixed-income securities as time passes.

Money market funds

Money market funds are also an income fund, but generally pay small amounts of income. Money markets are fixed-income securities with one year or less to maturity. Money market funds are low-risk and low-yield.

Many investors utilize money market funds similarly to their bank savings accounts. When an investor has cash in their investment accounts, it is typically invested in a money market fund. Priced at a consistent $1.00 per share, money market funds typically make monthly dividend payments to their investors. The investor can reinvest the proceeds and buy more $1.00 shares, or can take the payment as cash.

These funds are very liquid (easy to sell), provide a small amount of income, and are suitable for investors who have short-term time horizons.

Specialized funds

Specialized funds are not specific to growth or income investments. These are funds that only invest in securities from a specific industry or region. Some examples include Japan funds, biotechnology funds, and Latin American funds. Specialized funds can range in risk and potential return depending on the region or industry. Funds that invest in specific industries are sometimes referred to as sector funds.

Index funds

Index funds aim to provide their investors with the exact return of a specific index. An index is simply a list of securities that tracks and averages all of the values of the securities on that list. You’ve probably heard of the S&P 500, which is the most popular index in finance and commonly referred to as “the market.” The S&P 500 is a list of 500 large companies that are traded in the United States. Investors commonly use indexes to determine general trends in the market. When the S&P 500 is up, it is assumed that the general market is moving upward.

Indexes come in all shapes and sizes; indexes like the S&P 500 cover the general stock market. There are small and large cap indexes, which track stocks of smaller and larger companies, respectively. Also, there are a variety of bond indexes that track the bond values of a variety of issuers. Additionally, there are specialized indexes that track investments from specific industries and regions.

By investing in an index fund, investors are handing their money to a fund that is no longer looking for the best investments in the market, but instead trying to match the exact return of the index. Known as “passive” investing, this style of investing is becoming very popular in the market.

In this section, we discussed the most common funds in finance, which are important to know for the Series 66 exam (especially for suitability purposes). You’ll learn more about these funds in future sections.

Key points

Growth funds

  • Seek capital appreciation
  • Primarily invest in common stock

Growth and income funds

  • Seek capital appreciation and income
  • Primarily invest in common stock

Balanced funds

  • Seek capital appreciation and income
  • Invest in stocks and bonds

Income funds

  • Seek income
  • Invest in stocks and bonds

High-yield bond funds

  • Seek income
  • Primarily invest in speculative (junk) bonds

Conservative bond funds

  • Seek income
  • Primarily invest in investment-grade bonds

Asset allocation funds

  • Various asset mixes that may be static or fluid

Life cycle funds

  • Type of asset allocation fund
  • Asset mix becomes more conservative over time

MBS agency funds

  • Seek income from mortgage-backed securities (MBS)
  • Invest in MBSs from:
    • Ginnie Mae (GNMA)
    • Fannie Mae (FNMA)
    • Freddie Mac (FHLMC)

Money market funds

  • Seek income
  • Invest in debt securities with one year or less to maturity
  • Priced at a consistent $1.00 per share
  • Suitable for short-term time horizons

Specialized funds

  • Invest in securities from specific industries or regions

Sector funds

  • Invest in securities from specific industries

Index funds

  • Seek the return of a specific index

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