Mutual Fund Categories
The many fund categories depend on their objectives and underlying investments.
The plethora of mutual fund categories that are derived from the main types of mutual funds can be
broken down into two loose groups--those that describe their investment vehicles and objectives. As one would
expect, there is a good amount of overlap among these categories. The following are the most commonly used ones
that an investor will encounter:
Stock Funds/Equity Funds: As their name implies, these are invested
primarily in equity securities, an example being gold mutual
funds which are investing in gold-related companies.
Bond Funds/Fixed-income Funds: These invest mainly in bonds and
notes which can be further classified into long-term, medium-term and short-term as well as government, tax-free,
junk and corporate.
Balanced Funds/Blend Funds: These invest in a mix if stocks, bonds and
money markets at the discretion of their managers and depending on the economic environment.
Money Market Funds: These funds invest in short-term cash equivalents
like short-term treasury notes, overnight repos, certificates of deposits, commercial paper and municipal notes.
The idea is usually twofold: to maintain a share value at $1 and to keep the fund as liquid as possible.
International Funds: These invest in securites, usually equity but also
balanced, of companies headquartered outside the United States. Most of the time, these countries are understood to
mean Western Europe and Japan.
Global Funds: These funds invest in compaines both inside and outside the
U.S. but are still understood to mean the developed economies.
Emerging Market Funds: These invest in economies that are at the cust of
long-term growth and at present refer mainly to China, India, Brazil and Russia, the so-called BRIC countries. They
can also invest in developing countries like South Africa, Taiwan, Vietnam, Argentina and Chile as well as East
European countries like Bulgaria, Hungary and Romania.
Sector Funds: These funds invest in economic
sectors of the United States in order to give investors sector-specific exposure. For example real estate,
biotechnology, communications, semiconductors, media, transportation, internet and so on.
Index Funds: These funds invest in the securities, usually stocks, of
companies that make up certain market indices. Examples are the Dow Jones Industrials, S&P 500, NASDAQ, FTSE
(London), DAX (Frankfurt), CAC (Paris), NIFTY (Tokyo), MSCI EAFE (Europe Australia Far East), Hang Seng 100 (Hong
Kong), BSE Sensex (Bombay), CBOE Composite (commodities), Wilshire US REIT (real estate) and so on. The objective
is to track the performance of the index or to replicate it as closely as possible. A sub-category is
the Enhanced Index which uses a variety of options and futures techniques to leverage these index
returns either on the long or short side.
Large Cap Funds: Those that invest in companies with a market
capitalization of over $10 billion. Market capitalization refers to the value of all outstanding shares of a
company and is normally used to denote the relative size of a company.
Mid Cap Funds: Those that invest in the companies with a market
capitalization of between $1 billion and $10 billion.
Small Cap Funds: Investing in companies with a market cap of between $100
million and $1 billion.
Micro Cap Funds: Those that invest in companies with a market cap of less
than $100 million.
Growth Funds: These are aimed at growth of principal which typically
means equity investments (stocks) but can also include options and bonds.
Income Funds: Although these funds will typically invest in fixed-income
securities like bonds, they may also invest in dividend-paying stocks. In fact, many of the best "income" funds are
actually stock funds!
Value Funds: These invest in securities of companies that are thought to
be out of favor and undervalued but where a catalyst exists that could cause a turn-around in the company's
fortunes. The most well-known proponent of value investing is Warren Buffet of Berkshire Hathaway.
Balanced Funds: These typically invest in a blend of stocks, bonds and
cash to achieve a mix of growth and income.
The most popular and widely-used system of mutual fund
categories was developed by the mutual fund rating company Morningstar and articulated in
the Morningstar Style Grid which consists of 9 cubes, three labeled Large, Medium and Small
on one axis to denote size of companies and Growth, Balanced/Blend and Value on another axis. A mutual
fund can thus be labeled using one or more of these categorizations or a combination thereof. A
couple of examples are Large Cap International Stock Fund and Small Cap Global Value Fund.
Several well-tested mutual fund investment
strategies can help investors to use these categories in their mutual fund investing efforts based on their own