A reader once asked: "I'm confused by the many different kinds of mutual funds out there, such as 'Growth and Income,' 'Equity Income,' and 'Fixed Income.' How do these differ, and what other kinds of funds are there?"
There are a few key words to understand. Fixed income means bonds. Equity means stocks. Income funds aim to generate regular payoffs for shareholders through dividends from stocks and/or bond interest. Growth funds don't try to generate income. Instead, they tend to seek stock price appreciation. Sometimes you may see the term "Balanced" used, which means that the fund is about half stocks and half bonds, generally. There are many variations of these kinds of funds.
There are also other kinds of funds, such as industry-specific sector funds. One sector fund might focus on just biotechnology stocks. Another sector fund might concentrate on computer-related firms, while a third one might invest solely in banking stocks.
Some mutual funds focus on particular regions. One might invest in Indian companies, another might specialize in Russian companies, and a third might limit itself to Latin American enterprises. Note that "foreign" and "international" funds generally invest solely outside the U.S., while "global" or "world" funds include both American and non-American companies.
Other funds restrict themselves to certain sizes of companies, such as the universe of small-cap companies or large-caps.
"Index funds" mimic indexes. An S&P 500 index fund, for example, will contain stocks in the 500 companies that make up the S&P 500 index - in the same proportion as the index. These are passively managed funds, as opposed to actively managed ones -- because there's no manager subjectively evaluating and selecting stocks. Instead, it's just a matter of making sure that at all times the fund contains the appropriate stocks in the appropriate proportions.
Learn more about investing in mutual funds in our Mutual Fund area, and zero in on our index fund information there. Additional info about funds and stocks is found in our Investing Basics area.
Let us help you be a better mutual fund investor. You could do a lot of research yourself online, searching for funds with long, strong track records and managers who inspire your confidence and trust. Or simply grab a free trial of our Motley Fool Champion Funds newsletter, and see which funds our analyst Shannon Zimmerman is recommending (and has recommended in the past).
Learn much more in these Zimmerman articles:
