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.
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.
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 do a little better during bull markets, but do a lot worse than average during bear markets. Just as in aggressive growth funds, growth funds are not aimed at the short-term market timer.
Growth-income funds are specialists in blue chip stocks. These funds invest in utilities, 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 their sole investment.
International funds invest exclusively abroad, while global funds combine domestic and foreign shares in the same portfolio.
These funds confine themselves to a single foreign region, like Latin America, U.S.A., Europe or Asia.
When you buy one of these funds, you are betting on a single part of the foreign markets. Do you really know enough to make that sort of bet?
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.
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.
Mutual funds were actually invented so that investors with limited means could pool their money and thereby purchase a broadly diversified portfolio. That is why sector funds seem so definitely odd!
By specializing in the stocks of a single industry like technology, health care or financial services, these funds take the time-tested notion of diversification and toss it out the window.
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.
Long-Term Bond Funds:
Long-term bond funds performe well when interest rates came down. But when you buy funds, the goal isn't simply to own funds that might perform well. Rather, the idea is to build a portfolio that includes a collection of funds that together generate great returns while providing you with a smooth ride through turbulent markets.
On that count, long-term bond funds fail. When stocks fall, sometimes it's because interest rates are rising.
But under that scenario, long-term bond funds also will start losing, and they will not provide much protection for stock investors, so they don't seem like a useful addition to a well-rounded portfolio of stocks and bonds.
Balanced funds combine stocks and bonds, usually in a 60-40 mix. The stock portion often is invested in blue-chip shares, while the conservative segment is typically given over to longer-term bonds.
The idea is that balanced funds give you one-stop shopping. But they fall far short of that goal. What if the 60-40 mix is too aggressive or too conservative for you?
For those considering just holding one fund to achieve their goals, buying a balanced fund is tantamount to going into a shoe store and buying a pair of shoes without worrying about the size!
Money Market Funds:
They 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.
Market timing is bad enough! Bear-market funds take that mistake, and make it worse!
These funds bet that either individual stocks or the entire market will fall. This is a loser's game, because share prices go up over time!
Convertible bonds are bonds that can be swapped for the issuing company's stock at a predetermined share price. So what are convertibles, a stock or a bond? Therein lies the question!
Convertibles may appeal to bond investors who are so nervous they can't bring themselves to buy a pure stock fund but want some backdoor stock-market exposure.
But for those who already own regular stock and bond funds, it is difficult to see much reason to buy these funds.
Mutual-fund sales commissions are used to compensate brokers who sell funds. Don't need a broker's advice? There is no reason to pay a load!
At the super market, price may bear some relationship to quality. But when it comes to fund management, you don't get anything special for paying a lot in annual expenses!
In fact, high-expense stock, bond and money-market funds tend to lag behind their low-cost competitors. As a result, you would be well advised to stick with stock funds with expenses below 0.9%, bond funds that charge less than 0.7% and money funds that levy less than 0.5%.
Commodities mutual funds are those investing in certain designated real assets or their derivatives like futures contracts (instruments that facilitate investment in commodities). The commodities or the derivatives are traded for maximizing profits.
All said and done there are no commodity mutual funds in real terms and all those trading in commodities are hedge funds (hedge funds are for big time investors who can pool in excess of $1 million for the purpose of trading in commodities).
In a way commodity mutual funds are scaled down versions of hedge funds that provide a chance to retail investors to take a look at commodities market who otherwise were not able to.