Depending on their primary objective, most mutual funds can be divided into two groups—income or growth. There are funds that provide both income and growth; however, one of the objectives usually is a dominant factor. This paper will focus on popular types of growth mutual funds.
What Are Growth Mutual Funds?
The primary objective of growth mutual funds is to maximize capital gains. Growth funds consist mainly of common stocks. In addition to growth of capital, these funds can have another goal, which is income. It is important to point out that methods of achieving growth can vary between funds. Growth funds fall within three general categories of market capitalization: small-cap (invests in companies with market caps up to $1 billion); mid-cap (invests in companies with market caps of $1 billion to $5 billion), and large-cap (invests in companies with market caps of more than $5 billion).
What Are The Different Types of Growth Mutual Funds?
Below are general descriptions of some different types of growth mutual funds:
Aggressive Growth Funds
These funds focus on appreciation and may include warrants, restricted securities, stock index futures and options. A person investing in aggressive growth funds must be willing to take above-average risks in exchange for the potential of above-average returns. These funds are more volatile than any other classification of funds and are inappropriate for risk-averse investors. In bull markets, these funds will benefit the most. In bear markets, they will likely be the hardest hit.
Asset Allocation Funds
These funds provide a portfolio with a broad range of diversification. They may consist of bonds, U.S. stocks, foreign stocks, precious metals, and possibly, Swiss francs. Asset allocation funds usually produce a steady, long-term performance with low volatility and moderate income by decreasing the reliance on any one segment of the marketplace.
These funds provide both growth and income; meaning, they invest in both common stocks and bonds. Usually, 25% of assets are invested to bonds, such as U.S. government or corporate bonds. The growth portion is usually invested in blue chip stocks.
Convertible Security Funds
These funds strive to provide both capital appreciation and income. Most of their assets are invested in convertible bonds and convertible preferred stocks (although individual common stocks and bonds can be owned). Convertible securities are usually issued by smaller companies; therefore, there is potential for large gains if the companies do well. If companies do poorly, their convertible bonds can fall. Generally, convertible security funds do well in a period of good economic conditions and falling interest rates.
Precious Metal Funds (or Gold Funds)
These funds try to achieve capital appreciation (with income as a secondary consideration). They invest in gold, silver and platinum. Because gold and silver usually move in the opposite direction from the stock market, precious metal funds can provide a hedge against investments in common stocks. Generally, these will do well in periods of political and economic uncertainty.
These funds focus on capital appreciation. These are similar to aggressive growth funds but are less risky. They usually do not trade stock options. During bull markets, most growth funds will surpass the Standard & Poor’s 500 Stock Index. However, during bear markets, they usually perform a little below average. These funds can also move to a more defensive position by switching part of the fund’s assets into cash equivalents.
Growth and Income Funds
These funds attempt to produce both capital appreciation and income. They usually invest in utilities, Dow industrials and blue chip stocks. Some convertible securities and debt instruments may be found in these funds. Generally, growth and income funds have less volatility than growth funds, making them a suitable investment for conservative investors.
These funds are formed to match as closely as possible the investment performance of a stock index, such as, the S&P 500. They do this by buying the same securities, in the same proportion, as in the index. Some index funds try to outperform the index it mimics; however, most index funds are not trying to beat the market. Index funds usually do as well as the overall market.
International and Global Funds
International funds invest only in stocks of foreign companies. Global funds invest in both foreign and U.S. stocks. These funds are another means of diversification in that a portfolio can be diversified by the economies of other countries. Usually, these funds are too volatile as the sole investment for the average investor.
These funds invest in stocks of one geographical area, specific industry, or a specific investment theme (such as energy, technology, heathcare). The problem with these funds is that they do not provide diversification, which mutual funds are usually expected to provide. Sector funds lend themselves to market timing in that stocks in most industries will fluctuate; therefore, knowing when to buy and when to sell becomes important.
It is important to point out that, in certain instances, an individual fund may contain securities that are inconsistent with what is expected from the fund’s classification. Rule 35d-1 under the 1940 Act requires a fund to adopt a policy that 80% of its net assets will be invested in the type of investment suggested by its name. With that being said, an investor should be aware that individual funds can deviate from what is implied in the name, so be aware of such differences. It is also important that an investor closely read the prospectus of any fund being considered and review any concerns with an adviser. For more information regarding this topic, please contact Henssler Financial at 770-429-9166, or email@example.com.