Mutual funds can take a lot of the guesswork out of asset allocation because they’re typically already diversified. While individual funds may have different objectives, in general terms mutual funds aim to make money for shareholders by investing in stocks, bonds or cash or a combination of the three.
A growth fund, for example, will invest mostly in stocks, while a fund designed to provide income may invest mainly in bonds.
Here are the main objective-based fund categories you’ll find in American Funds.
- Growth funds — These invest primarily in the stocks of companies that have the potential for above-average gains. These companies often pay small or no dividends, and their stock prices tend to have the most ups and downs from day to day.
- Growth-and-income funds — These typically invest in stocks of companies that pay dividends and have good prospects for earnings growth. They can also invest in bonds, which can provide income. They’re generally less risky than growth investments because the income from dividends and bond interest can help cushion the ups and downs.
- Equity-income funds — These invest primarily in dividend-paying stocks and bonds. Because equity-income funds don’t place their primary emphasis on growth, they tend to produce lower returns compared to growth funds during strong upswings in the stock market. The emphasis on income, however, can soften the impact of a stock market downturn.
- Balanced funds — These invest primarily in a combination of stocks, bonds and cash-equivalent investments. Over the long term, they seek growth of both capital and income. Balanced funds tend to produce more income than growth funds, which can help returns during a stock market downturn. At the same time, they also tend to have lower returns than growth funds when the stock market is rising.
- Bond funds — These are designed to provide regular income from interest paid by the bonds they hold. Since bond investments seek to produce income, they typically help investors ride out stock market downturns. But they also tend to have lower returns than growth funds during a stock market upturn.
- Capital-preservation funds — These invest in short-term securities such as U.S. Treasury bills and certificates of deposit. Although they’re not federally insured or guaranteed, they aim to preserve your investment.
- Target date funds — Investors select the target date fund closest to the year of retirement. As the target date nears, the fund’s focus changes from a growth- to a more income-oriented strategy.
- Portfolio series — These are broadly diversified funds of funds made up of underlying funds that have been selected and allocated to pursue specific investment objectives.