Types of Mutual Funds
Equity (Stock) Funds
Funds that invest in stock represent the largest category of mutual funds. Generally, the investment objective of this class of funds is long-term capital growth with some income. However, there are many different types of equity funds because there are many different types of equities. A great way to understand the universe of equity funds is with a style box, an example of which is below.
Funds are generally put in two categories by the size of the companies in which they invest and the investment style of the manager. For example, a "value" style invests in high quality companies that are out of favor with the market. The opposite of a value style is a "growth style", which refers to companies that have had (and are expected to continue to have) strong growth in earnings, sales, and cash flow, etc. Between value and growth is a "blend style," where the portfolio manager can invest in both value and growth companies.
As for a fund being categorized by size, a mutual fund is generally known as a large cap, mid cap, or small cap fund. The term "cap" refers to the capitalization or size of the underlying companies. For example, a large cap fund buys companies that are valued at $10-$200 billion, a mid cap fund buys companies that are valued at $2-$10 billion, and a small cap fund buys companies valued at $300 million - $2 billion. History shows that the large cap companies are generally considered less volatile, while small cap companies are generally considered more aggressive both in terms of risk and return.
An international fund (or foreign fund) invests only outside your home country, not in your country. By themselves, international funds are considered more volatile because of their unique country and political risks. However, experience has shown that they can actually reduce risk as part of a well-balanced portfolio by increasing diversification and reducing the volatility in your portfolio in the event of a market decline in our country.
This classification of mutual funds consist of funds that have proven to be popular but don't necessarily fit in the standard categories. This type of mutual fund is generally not broadly diversified and concentrates on a certain segment of the economy.
Sector funds are targeted to specific sector of the economy such as financial, technology, health, etc. Sector funds are extremely volatile. There is a greater possibility of big gains, but you have to take on the risk that your sector will dramatically fall.
This type of mutual fund buys and sells the exact same investment of a broad market index such as the S&P 500. An index fund attempts to replicate the index return with the exception of the expense of a fund manager, which is generally very conservative.