Every mutual fund has an investment objective that spells out its goals. The objective states what investing style the fund's manager pursues and how he or she intends to carry out that objective.
For example, a typical growth and income fund's objective could read like this: "Growth and Income Fund X seeks growth of capital and dividend income. The fund invests at least 65% of its assets in common stock of large, well-established companies with a history of paying level or rising dividends. The fund may invest up to one-third of its assets in foreign securities."
There's a lot of information packed into those two sentences. From reading this objective, you've learned that the fund is traveling down the proven growth and income route, buying up stocks of large companies with solid histories of dividend payments.
Sector funds concentrate portfolios in one industry, ranging from those focused on technology to others focusing on health care or the financial industry. Keep in mind that, in some cases, a fund's name is really not consistent with its objective, although it is in this case.
Note also from this objective that Growth and Income Fund X may invest a full third of its assets outside of the United States. The key word here is "may."
To see exactly what percentage of assets is invested oversees, take a look at the global weighting, which can be found in a fund's Morningstar report, as well as in the fund's annual report to shareholders.
Some investors are wary of funds that invest a significant proportion of their assets overseas, because it isn't always easy to get information about foreign companies. Without adequate information, it can be hard to tell whether these foreign companies are growth companies or the type of companies you want to invest in.
When it comes to stock funds, investment objectives range from the most conservative to the most aggressive.
Index funds attempt to replicate the performance of a portion of the market or even of the entire market. The most widely followed index is the Standard & Poor's 500 index, which consists of the 500 largest publicly traded U.S. companies on domestic stock exchanges.
Index funds are based on a variety of domestic and foreign indexes. Before you invest in an index, be sure you know exactly what types of companies your chosen index invests in.
Balanced funds hold stocks and bonds. Traditionally, the proportion allocated to stocks and bonds has been close: 60/40 or 65/35 one way or the other. Make sure that whatever balanced fund you choose does divide its assets between stocks and bonds using a stated formula; otherwise, you may be purchasing a stock fund or bond fund in disguise.
Stock income funds focus their investment on high-dividend-yielding companies and pay out more dividends and distributions to shareholders than other types of funds. Stocks held by a stock income fund typically account for 60% to 75% of such a fund's portfolio.
The trade-off here is that the dividend income gained by fund shareholders is often at the expense of slower growth and lower price appreciation for fund holdings.
Growth and income funds hold growth and income stocks. They can also hold more bonds to generate income. These funds are designed to be less volatile than typical growth funds, and they provide some of the income potential traditionally found in stock income funds.
Growth funds seek to profit from capital appreciation; that is, an increase in share prices of their individual company holdings. To accomplish this, fund managers invest in companies that exhibit rising sales and earnings.
If about 90% of a growth fund's assets are in stocks of large, established companies with a moderate rate of growth and paying high dividends, a strong degree of stability is provided, offsetting risk.
Aggressive-growth funds aim for maximum gains by taking larger risks than other growth funds. Managers invest in companies with estimated potential, or by purchasing smaller companies in popular industries.
Because of this aggressive investment philosophy, the turnover rate of aggressive-growth funds can be extremely high. A high turnover brings higher commissions and potentially higher capital gains that can increase your investing costs.
Keep in mind that a fund's name is not necessarily consistent with its objective. Sector funds concentrate their portfolios in one particular industry. There are many types of sector funds, ranging from those focused on technology to others focusing on health care or the financial industry. Because these funds have a concentrated portfolio, they tend to be highly volatile.
International funds invest in companies around the world. Be aware of different types of funds within the international category. Global funds can invest anywhere in the world, including in the United States. International funds invest only in countries outside the U.S. There are many narrowly focused funds that invest in one particular country or region of the world.
In the growth style of investing, the fund manager seeks out companies with above-average sales and earnings growth.
Under the value style of investing, managers purchase companies that appear to be undervalued. Valuation is based on certain defined measurements such as price-to-earnings (P/E) ratios, price-to-book-value ratios, or "fair value," a ground-up valuation of the company's business expressed in dollars per share. Fund managers assess such opportunities based on their experience with other turnaround situations.
With the blend style of investing, managers blend both growth and value investing. In some cases, they follow a growth philosophy, while in others, they look for undervalued opportunities.
Both growth and value investing have their proponents and both styles have done well in years past.
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Neither CUNA nor the author of this article is a registered investment adviser. Readers should seek independent professional advice before making investment decisions.