Like carmakers and fashion designers, mutual fund companies offer their products in a wide variety of styles to meet the varying needs of investors. When deciding which mutual fund or funds would be best for you, it’s important to learn about all of the types of funds available.
At a high level, most funds can be classified into one of three general categories defined by the types of assets in which they invest. Although mutual funds are typically diversified within their asset class, they still carry the risk of loss of capital. Here are the three primary categories of funds:
- Stock funds, also known as equity funds, invest in stocks. Stock funds historically have delivered better long-term returns than bond funds, but with more volatility. They are thus considered a riskier, but higher-growth, investment.
- Bond funds, also known as fixed-income funds, invest in bonds. Bond funds are most appropriate for investors seeking income. Historically bond funds have generated lower long-term returns than stock funds, but with less volatility. They are thus generally considered a more conservative investment, although risks vary based on the type and quality of bonds held by a fund.
- Mixed asset funds, also known as asset allocation funds, invest in both stocks and bonds. They seek to deliver the benefits of broad diversification—spreading one’s investment risks over many different types of assets—in a single fund. Although stock and bond funds are diversified within their asset class, mixed asset funds provide a greater level of diversification.
Beyond these broad categories, there are many subcategories of funds which are distinguished by such factors as the types of securities they own, the level of risk they present, and their investment horizon. By category, they include:
- Large-cap funds invest in large-company (large-capitalization) stocks, such as those listed on the S&P 500 Index. The S&P 500 Index is a market-cap-weighted index that represents the average performance of a group of 500 large-capitalization stocks. To be included in the S&P 500, a company generally has a market cap of at least $4 billion.
- Small-cap funds invest in small company (small capitalization) stocks, such as those listed on the S&P 600 Index, which generally may have a market cap of $300 million to $1.4 billion.
- Mid-cap funds invest in stocks of medium-sized (mid-capitalization) companies, such as those listed on the S&P Mid Cap 400 Index, which represents the average performance of a group of 400 mid-sized stocks which generally have a market cap of $1 billion to $4.4 billion.
- Growth funds invest in stocks of companies expected to have above-average earnings growth, and that reinvest their earnings in their businesses. The potential for returns from growth funds comes primarily from capital appreciation rather than dividends.
- Value funds invest in stocks that are considered undervalued relative to their intrinsic worth. They often pay dividends.
- Equity income funds are stock funds that invest primarily in dividend-paying stocks that are expected to generate an income stream for their shareholders.
- Domestic equity funds, for U.S.-based investors, are funds that invest in stocks issued by companies based in the U.S.
- International equity funds invest in stocks outside the U.S.
- Emerging market equity funds invest in stocks in developing economies around the world, such as Latin America, Africa, Eastern Europe, and Asia.
- Global equity funds invest in stocks anywhere around the world, including the U.S.
- Sector equity funds invest in stocks in specific industries, such as utilities, health care, technology, or energy.
- Government bond funds invest in debt securities issued by the U.S. Treasury, but also may invest in debt securities issued by government agencies. Some government bond funds specialize in categories such as government agency securities, short-term bonds, and intermediate-term bonds.
- Long-term bond funds invest in bonds maturing in more than 10 years.
- High-yield funds invest in bonds that pay a relatively high interest rate compared with most other bonds on the market. (These bonds are sometimes referred to as “junk bonds.”) High yield bonds are typically issued by companies with credit ratings below investment grade. Because of their higher credit risk, these bonds must typically pay higher rates of interest than investment-grade bonds of comparable maturity in order to attract investors.
- Municipal bond funds invest in bonds issued by state or local governments or their agencies. They also are known as “tax-exempt bond funds” because interest earned on municipal bonds is generally exempt from federal income taxes, and, in some cases, state and local taxes as well.
- International bond funds invest in debt securities issued outside the U.S.
- Emerging market bond funds invest in debt securities issued in developing countries in Latin America, Africa, Eastern Europe and Asia. While these funds tend to be riskier than bond funds of developed countries, they typically compensate for that risk by offering a higher yield.
- Global bond funds invest in debt securities issued around the world, including the U.S.
- Money market funds typically invest in short-term government debt securities such as Treasury bills, and many seek to maintain a net asset value of $1 per share.
- Asset Allocation Funds (sometimes referred to as target risk funds) invest in both stocks and bonds while seeking to maintain a specific risk profile, such as aggressive, conservative, moderately aggressive or moderately conservative. The most aggressive have a higher allocation to stocks and a smaller allocation to bonds. The most conservative have a higher allocation to bonds and a smaller allocation to stocks.
- Balanced funds invest in both stocks and bonds, usually in fairly equal or “balanced” proportions. A common mix may be 60% stocks and 40% to bonds or 50-50. A balanced fund is essentially the same as a moderate asset allocation fund.
- Income funds can be stock funds, bond funds or a combination of both. They invest in securities that generate an income stream for their shareholders, primarily through dividends (if they invest in stocks) or interest payments (if they invest in bonds). Income funds that invest primarily in stocks are sometimes referred to as equity income funds.
- Target-date funds invest in both stocks and bonds in a mix that becomes more conservative over time, meaning the fund gradually allocates less of its assets to stocks as it approaches its “target date.” That date generally represents the approximate year an investor in the fund plans to retire.
Whether you hope to invest in one mutual fund or several, you’ll find many options designed to meet your objectives.
Thrivent Mutual Funds offers more than 20 no-load mutual funds, including a variety of stock, bond and asset allocation funds. See: Thrivent Mutual Funds for goals of all shapes and sizes