Welcome back to another edition of Foolish mutual fund basics. This time, we're leaving behind the dark alleys where 12b-1 fees live for an exotic tour of the financial zoo that is fund categories. Ready to get started? Good.

What it is
Ever heard the phrase "large blend?" I have -- at the Starbucks at the mall where I was Christmas shopping over the weekend. To the patrons, "large blend" meant, "Give me a steaming hot espresso with milk, please."

But for fund-tracker Morningstar, "Large Blend" refers to a fund that invests in multiple asset classes, with an emphasis on large-cap stocks. Confused? Check out these categories:

  • Long-Short
  • Bear Market
  • Intermediate Government

"Long-Short" sounds like an unbearably long documentary film. "Bear Market" sounds like a place you go to buy bears. And "Intermediate Government" could be another way to describe the current lame-duck Congress.

Yet each of these descriptors refers to an investing style. Take "Long-Short." Investopedia defines it as a mutual fund that employs some of the strategies of hedge funds, which sometimes short stocks to balance high-risk long positions. (More Foolish coverage of "long-short" funds can be found here.)

How it works
Should you care about Morningstar's nutty nomenclature? Unfortunately, yes. Research says that investors do best in a diversified portfolio. For fund investors, there are two types of diversification: by asset class and by investing style.

Asset allocation is a topic for a future article. For now, think of it as ensuring your portfolio has enough bonds and money market funds to go with your stocks and stock funds.

Style is where the Morningstar categories come in. They're helpful because certain investing strategies are more aggressive than others. "Long-Short," for example, is a high-risk method of obtaining big returns. "Intermediate Government," meanwhile, refers to purchasing debt securities issued by the Treasury Department. Since the U.S. is still the world's most trustworthy creditor, investing this way is considered conservative.

Knowing the distinctions are key to building a successful portfolio, says Shannon Zimmerman, who co-advises Motley Fool GreenLight and who leads our Champion Funds service. "The big-picture goal is to build a well-diversified portfolio that will let you have pleasant dreams while building market-beating wealth," Shannon wrote in the June issue of Champion Funds.

Go under the hood
He was referring to a practice many Fools call 360-degree investing, in which every stock and fund choice is viewed through the lens of your portfolio. Think the recent plunge in the share prices of Marvell Technology (NASDAQ:MRVL) and Sirius Satellite Radio (NASDAQ:SIRI) have created a buying opportunity? Great, but how many speculative stocks do you already own? What percentage of your portfolio is dedicated to high-risk stocks and funds? 20%? 30%? 50%?

It's worth asking. Novice investors do best when they think of their portfolios in the broadest terms. That way, they're less likely to overcommit to one style or asset class. (Shannon is so fervent about this practice that he's created three model fund portfolios for Champion Funds subscribers.)

If you're a fund investor, perform a checkup on your 401(k) today. Visit Morningstar.com and write down the category for every fund you own. Are three of four funds in your portfolio "large?" Chances are you're not being aggressive enough. Are all of your funds "growth?" Chances are you're being too aggressive. And so on.

Follow the money
Categories often seem silly. "Large growth?" See a doctor. "Small blend?" No, I ordered a mocchachino. "Long-Short?" I give it one-and-a-half out of five stars.

Yet for as silly as these nicknames sound, the science behind them is serious. So, study the categories. Know what you own. The effort will make you a better investor.

Interested in more moneymaking tips? Consider GreenLight. Shannon and co-advisor Dayana Yochim are offering 30 days of free access to the service right now. Click here to get started.

Interested in more mutual fund basics? Your digital chariot awaits:

Fool contributor Tim Beyers, ranked 1,113 out of 17,896 in Motley Fool CAPS, would like a large blended gingerbread latte, please. Oh, and make that decaf. Tim didn't own shares in any of the companies mentioned in this article at the time of publication. Get a peek at everything he's invested in by checking Tim's Fool profile. The Motley Fool's disclosure policy is as crystal clear as the Colorado sky.