Types of Mutual Funds

Based upon the risk and return parameters of your financial plan, you may pick one or more of many types of mutual funds. This section clarifies major types of mutual funds. In all cases, you should read the fund prospectus which is usually available on line at your broker’s website.

Another factor determining which mutual funds you use is how active you want to be in trying to pick the best mutual fund manager in each segment of the market. Many people will be more comfortable either using balanced funds (stock and bond) or blend funds (value and growth stocks) rather than picking specific value or growth managers.

Every investor will need a Money Market Mutual Fund as the place to hold cash until it is redeployed.

Investors who want minimal involvement will probably use a balanced or asset allocation fund (typically 60% stocks and 40% bonds) or a target fund which usually starts with a higher allocation to stocks which declines as the target date approaches.

Investors who want more involvement may use Blended Funds (growth plus value stocks). This may also be good for investors who do not want bond exposure in a rising interest rate environment.

Investors who want the most involvement may try to slant toward growth or value. Anticipating the economic cycle and the switch from growth to value or vice versa can by tricky. An indicator can be the Mutual Funds chart in Investors Business Daily which on a delayed basis shows whether value or growth mutual funds are outperforming.

Capitalization, or “Cap”, is a measure of a company’s stock price times the number of shares outstanding. For example at the time of this writing, Wal-mart ($202 bn) is a large-cap company. Best Buy ($9 bn) is a mid-cap and Barnes & Noble ($1 bn) is a small-cap. All are recognizable names.

	VALUE ( Low P/E ) Typically Early in an Economic Recovery	BLEND ( Value & Growth )	GROWTH ( High P/E ) Typically Late in an Economic Recovery
LARGE CAP ( > $10 Billion )
MID CAP ( $2 - $10 Billion )
SMALL CAP ( < $2 Billion )
MICRO CAP ( $50 - $550 Million )
REAL ESTATE		Your Home
BALANCED or ASSET ALLOCATION FUND
INTERNATIONAL EQUITIES
LONG TERM BONDS ( > 10 YRS )
MEDIUM TERM BONDS ( 3-10 YRS )
SHORT TERM BONDS ( UNDER 3 YRS )
MONEY MARKET