Making the Most of Mutual Funds

Making the Most of Mutual Funds

There are now more funds than stocks. Hardly a week passes that some publication isn`t coming out with its “exclusive rankings” of the best mutual funds ever. Most of the rankings are perfectly legitimate and loaded with useful information. But if you’re the average investor, you needn’t watch your mutual funds as closely as a three-minute egg. On the other hand, neither should your mutual funds be stored untended for years, like fine wines in a cellar. An annual check-up seems about right.

Different kinds of funds have different investment objectives, that’s generally how funds are grouped so that investors can compare apples with apples. But, in truth, the dividing line between categories can be somewhat squishy. Typically, the funds themselves decide what category they belong in – not some independent authority or government agency. And different publications often classify funds in different categories. What exactly, for example, is the difference between a “growth” fund? How different will the investment strategy of one fund be from another? A careful investor will want to understand the fund classification categories. Following is a brief explanation of categories used to compile funds’ rankings.

Aggressive funds: They seek the rapid growth of capital, often through investment in smaller companies and with investment techniques involving greater-than-average-risk, such as frequent trading, leveraging, and short-selling. This category also includes Small Company funds, a type of und that seeks capital appreciation by investing primarily in stocks of small companies, as determined by market capitalisation.

Growth funds: They invest primarily in equity securities. Current income, if it is considered at all, is a secondary objective.

Total return funds: They include Equity Income funds that invest at least 65 percent of assets in equity securities with above average yields, and Growth and Income funds that seek growth of capital and current income as near-equal objectives, primarily by investing in equity securities with above-average yield for appreciation.

International funds: Among the international funds are European stock funds which generally invest at least 65% of assets in equity securities of issuers located outside the United States; Pacific stock funds, which invest primarily in issuers located in countries in the Pacific basin, including Japan, Hong Kong, Malaysia, Singapore, and Australia; and World Stock funds, with holdings in equity securities of issuers located throughout the world, maintaining a percentage of assets (normally 25 to 50 percent) in the Unites States.

Making the most. Illustration by Elena

Speciality funds: This type of fund seeks capital appreciation by investing in equity securities in a single industry of sector, like health, technology, utilities, or natural resources.

Hybrid funds: These have substantial holdings in both stocks and bonds, or hold securities that have characteristics of both stocks and bonds.

Convertible bond funds: They invest primarily in bonds and preferred stocks that can be converted into common stocks.

Corporate bond high-yield funds: This type of fund will generally invest 65 percent or more of its assets in bonds rated below investment grade. The price of these issues generally is affected more by the condition of the issuing company (similar to a stock) than by the interest-rate fluctuation that usually causes bond prices to move up and down.

Corporate bond funds: These funds invest in fixed-income securities, primarily corporate bonds of various quality ratings. This category also includes high Quality Corporate Bonds funds that have at least 65 percent of their holdings in securities rated A or higher.

Government bond general funds: This type of fund invests in a blend of mortgage-backed securities, Treasuries, and agency securities.

Government bond treasury funds: These funds invest at least 80 percent of their assets in U.S. Treasury securities.

Government bond mortgage funds: These funds generally invest 65 percent of their assets in securities that are backed by mortgages.

International bond funds: These funds seek current income with capital appreciation as a secondary objective by investing primarily in bonds denominated in currencies other than the U.S. dollar. These bonds are frequently issued by foreign governments. Also includes Short-Term World Income funds that seek income and a stable net asset value by investing primarily in a portfolio of various non-U.S. currency-denominated bonds, usually with maturities of three years or less. Short-term world income funds seek higher yields than a money market fund and less fluctuation of their net asset value (NAV) than a world bond fund.

Municipal bond funds: These funds seek income that is exempt from federal income tax by investing primarily in bonds issued by any state or municipality.