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Types of mutual funds

With many different mutual funds to choose from, how do you distinguish one from another, let alone choose which ones to invest in?

Each fund has an investment objective. One might be long-term growth. Another fund might focus on providing income in the form of dividends paid by its investments. Mutual funds select investments (such as stocks, bonds or capital preservations) to meet those objectives. Keep in mind that mutual funds are not guaranteed or insured by any bank or government agency. You can lose money. Every mutual fund carries a certain amount of risk.

Familiarize yourself with the different types of funds and their investment objectives below and then talk to your financial professional to find a good match for your own investing style and goals.

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Type of fund Investment objective Characteristics
Growth funds Primarily invest in the stocks of companies that have the potential for above-average gains.
  • The most volatile type of fund. Growth funds tend to rise faster in bull (rising) markets and drop more sharply in bear (falling) markets than other types of funds.
  • Generally better suited for investors with a higher tolerance for risk or for investors with a longer time horizon.
Growth-and-income funds Typically invest in stocks of companies that pay dividends and have good prospects for earnings growth. These funds also invest in bonds (which provide income).
  • Generally less risky than growth investments because the income from dividends and bonds can cushion the ups and downs from price fluctuations.
Equity-income funds Invest primarily in dividend-paying stocks and bonds.
  • Because they don’t place their primary emphasis on growth, they tend to produce lower returns (compared to growth funds) during upswings in the market.
  • Their emphasis on income can soften the impact of a stock market downturn.
Balanced funds Invest primarily in a combination of stocks, bonds and capital preservations. Seek growth of both capital and income over the long term.
  • They try to offer a diversified mix of investments.
  • Tend to produce more income than growth funds. This can help returns during a stock market downturn.
  • Generally provide lower returns than growth funds during a market upswing.
Bond funds Invest in bonds and are designed to provide regular income from interest paid by the bonds they hold.
  • Income from bonds can sometimes help investors ride out stock market downturns.
  • Tend to provide lower returns than growth funds during a market upswing.
  • Risks include potential loss when a bond issuer defaults, or fluctuations in price as a result of changing interest rates.
Capital preservation funds Invest in short-term securities such as U.S. Treasury bills and CDs. Although they’re not federally insured or guaranteed, they aim to preserve the initial investment.
  • Typically carry far less risk than other types of investments.
  • Tend to provide the lowest returns of the funds described and may not keep pace with inflation.
Target date funds Attempt to balance investors’ needs for both growth and stability by automatically adjusting fund holdings as investors near their retirement dates.
  • Designed to serve as a single diversified investment.
  • Holdings are automatically adjusted over time, shifting from a higher percentage of growth funds to a higher percentage of income-oriented funds as retirement date approaches.
  • Will continue to pursue income, capital conservation and some growth after the retirement date is reached.
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