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A simple guide to popular fund choices.
You can investigate fund choices for these categories and more at www.morningstar.com .
Choosing the right types of mutual funds can be a daunting task. They should reflect your long-term investment goals and risk threshold. Here's a guide to some of the fund types you're most likely to encounter.
Money-market funds usually earn better interest than bank money-market accounts and offer limited check-writing privileges. They aren't a way to get rich, but they're practically risk-free. Many fund families offer them.
Bond funds, which deliver current income, come in many varietiestaxable, tax-exempt, long term, short term, and international. Since they seldom react to market conditions the same way stocks do, you should probably own at least some, to diversify your portfolio.
Balanced funds, which typically put 60 percent of assets into stocks and 40 percent into bonds, balance the steadiness of bonds with the volatility of stocks. They're a good choice for conservative investors who like stability.
Asset-allocation funds, close cousins to balanced funds, invest in stocks, bonds, and cash equivalents. There are two types of asset-allocation funds: fixed and flexible. Fixed funds put a predetermined mix of assets in each of the three investment categories while flexible funds adjust their mix of assets based on changing market conditions. They have the potential for higher earnings (and risk) than balanced funds.
Growth-and-income funds invest in large, established blue-chip companies that can offer both rising stock prices and consistent dividends. Growth-and-income funds are generally less volatile than index or growth funds and often perform just as well.
Index funds invest in securities that make up a certain market index, such as the S&P 500. Lack of active management means lower operating expenses and lower costs passed on to investors. Proponents of index funds argue that most managers don't beat the indexes consistently, anyway, so why pay for their services?
World and foreign funds offer another way to diversify your portfolio. World/global funds invest heavily in equities issued outside the United States, with usually no more than half their assets in US companies. Foreign/international funds focus on equities outside the US, and some specialize in particular regions, such as Europe or emerging markets. These funds are subject to currency and market risk.
Growth funds look for long-term capital appreciation. They usually invest in dynamic larger companies whose long-term earnings are expected to increase faster than those of stocks that make up the major market indexes. They can be riskier than the average stock because of their usually higher P-E ratio and lack of dividends.
Value funds invest in companies the manager believes are currently undervalued, but that will eventually be recognized and rewarded by the market. Diversifying among growth and value funds is a sound investment strategy, no matter the current market conditions.
Vicki Brentnall. Know your mutual funds. Medical Economics 2003;6:90.