Aggressive Growth Funds
Aggressive growth funds aim to maximize capital gains (buy low and sell high). These funds may leverage their assets by borrowing funds, and may trade in stock options.
These funds often have low, current yields. Because they don't invest for dividend income, and often have little cash in interest-bearing accounts, short-term yield is not optimized.
If the market is going up, these are the funds that will benefit the most. Conversely, aggressive growth funds are the ones hardest hit in bear markets. The volatility of these funds makes them inappropriate for risk-averse investors.
Growth funds are similar to aggressive growth funds, but do not usually trade stock options or borrow money with which to trade. Most growth funds surpass the S&P 500 during bull markets, but do a little worse than average during bear markets.
Just as in aggressive growth funds, growth funds are not aimed at the short-term market timer. The aggressive investor may find that they are an ideal complement for aggressive growth funds, as the differing investment strategies used by the two types of funds can produce maximum gains.
The volatility of these funds makes them inappropriate as the sole investment vehicle for risk-averse investors.
Growth-income funds are specialists in blue chip stocks. These funds invest in utilities, Dow industrials, and other seasoned stocks. They work to maximize dividend income while also generating capital gains. These funds are suitable as a substitute for conservative investment in the stock market.
Income funds focus on dividend income, while also enjoying the capital gains that usually accompany investment in common and preferred stocks. These funds are particularly favored by conservative investors.
International funds hold primarily foreign securities. There are two elements of risk in this investment: the normal economic risk of holding stocks; as well as the currency risk associated with repatriating money after taking the investment profits. These funds are an vital aspect of many portfolios, but any individual fund may prove too volatile for the average investor as the sole investment.
Asset Allocation Funds
Asset allocation funds don't invest in just stocks. Instead, they focus on stocks, bonds, gold, real estate, and money market funds. This portfolio approach decreases the reliance on any one segment of the marketplace, easing any declines. A plus factor is limited by this strategy as well.
Precious Metal Funds
Precious metal funds invest in gold, silver, and platinum. Gold and silver often move in the opposite direction from the stock market, and thus these funds can provide a hedge against investments in common stocks.
Bond funds invest in corporate and government bonds. A common misunderstanding among investors is that the return on a bond fund is similar to the returns of the bonds purchased. One might expect that a fund that owns primarily 8 percent-yielding bonds would return 8 percent to investors. In fact, the yield from the fund is based primarily on the trading of bonds, which are extraordinarily sensitive to interest rates. Thus, one could find a bond fund that was earning double-digit returns as the prime rate climbed from 4 percent to 6 percent.
In addition to mutual funds, there are money market funds, which are essentially mutual funds that invest solely in government-insured short-term instruments. These funds nearly always reflect the current interest rates, and rarely engage in interest-rate speculation.
For further reading consult The Mutual Fund Encyclopedia by Gerald W. Perritt, Dearborn Financial Publishing (800-533-2665).