Learning how mutual funds are categorized can help you choose the best funds for asset allocation and diversification.
Types of Stock Mutual Funds
Stock funds are first sorted by style in terms of their average market capitalization. This is the size of a business equal to the share price times the number of outstanding shares. Large-cap stock funds invest in the stocks of corporations with a market capitalization greater than $10 billion. These companies are so large that you may purchase goods or services from them on a regular basis. Some large-cap stocks include Walmart, Exxon, GE, Pfizer, Bank of America, Apple, and Microsoft. Mid-cap stock funds invest in the stocks of those with mid-size capitalization between $2 billion and $10 billion. You may know many of these names, too, such as Harley Davidson. But you may not know others, such as SanDisk Corporation. Small-cap stock funds invest in the stocks of corporations of small-size capitalization between $300 million and $2 billion. A billion-dollar corporation may seem large, but it’s relatively small compared to companies the size of Walmart and Exxon.
Types of Stock Mutual Fund Objectives
Stock funds are next grouped according to their objectives: growth, value, or blend.
Blend stock funds invest in a blend of growth and value stocks, as the name suggests. Growth stock funds invest in the stocks of companies that are expected to grow at a rate faster than the market average. Value stock funds invest in the stocks of companies that are expected to be selling at a price lower than the market value. Value stock funds are often called dividend mutual funds. They pay dividends to investors. A growth stock does not pay dividends. The corporation reinvests them to grow further.
Stock funds can also be categorized as international or foreign stock. They can be sorted by geographic region, such as European or Pacific Rim. They can be further grouped into specialty areas. These are often called sector funds. They might include health, real estate, technology, energy, consumer staples, or utilities.
Bond Mutual Fund Categories
Bonds are like IOUs issued by the U.S. Government or corporations. They borrow money by issuing bonds. Government bond funds invest in types of U.S. Treasury bonds. Municipal bond funds invest in types of municipal bonds. The bond issuer is often a state within the U.S., such as the California Municipal Bond. Corporate bond funds invest in various bonds issued by corporations. Bond funds are also sorted by the average duration of the bonds held in the mutual fund. This is similar to, but not always the same as, maturity. Long-term bond funds purchase bonds with a duration of greater than 10 years. Intermediate-term bond funds buy bonds with durations of 3.5 to six years. Short-term bond funds focus on bonds with durations of one to 3.5 years. Ultra-short term bond funds purchase bonds with durations of less than one year. Bond mutual funds can be further distinguished by the credit quality of the underlying bonds held in the fund. U.S. Treasury bonds are among the highest in credit quality, so they’re a low risk to the bondholder. “Junk bonds” are among the lowest in credit quality. They’re a higher risk to the bondholder.
The Bottom Line
You’ll know how a mutual fund invests when you understand the basic types of funds and the terms used to describe them. You’ll know that a fund invests in non-U.S. stocks that combine for a blend of growth and value goals if you see a mutual fund in a category such as “Foreign Large Blend.” NOTE: The information on this site is provided for discussion purposes only. It is not investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.
