Trust Services

Types of Mutual Funds

Bond/Fixed Income Funds
Income funds are named appropriately after their purpose – to provide current, steady income. The terms fixed-income, bond, and income mean the same thing; these funds invest primarily in government and corporate securities. While mutual fund holdings may appreciate in value, the primary objective is to provide a steady cash flow to investors. As such, the audience for these funds usually consists of conservative investors and retirees.

Bond funds are likely to pay higher returns than certificates of deposit and money market investments but they aren’t without risk. Because there are many different types of bonds, bond funds can vary dramatically depending on where they invest. For example, high yield (junk) bonds have a much higher risk factor than a fund that invests in government securities. So, if a bond fund purchases bonds of companies that go bankrupt, this will cause the fund’s share price to drop.

Bond fund investors also experience share price fluctuation due to interest rate changes in the economy. For example, while the US Government guarantees the return of your investment at maturity with an individual government bond, all bets are off with a government bond mutual fund. That’s because, in exchange for the benefits of a mutual fund described above, you don’t own a single investment. Instead, you own a share price of a fund that never matures. This share price will rise as interest rates fall and the bonds in the fund with higher interest rates become more valuable. Conversely, as interest rates rise, bond fund prices will fall as the bonds in the fund have lower rates than an investor could purchase on a new issue.

Asset Allocation (Hybrid/Lifestyle) Funds
The goal of these funds is to provide a mixture of safety, income, and capital appreciation, based on the client’s investment objective. The objective of these funds ranges from conservative, to moderate, to aggressive using a combination of fixed-income and equities. For example, a fund with a moderate investment objective might have a weighting of 60% stocks and 40% bonds, while a fund with an aggressive objective may have a weighting of 80% stocks and 20% bonds. For an investor who is not interested in making asset allocation and individual mutual fund decisions, these funds are perfect as the portfolio manager is given freedom to switch among asset classes as the economy moves through the business cycle. It is the portfolio manager’s job to have you invested in the right place at the right time.


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