- The great majority of mutual funds that concentrate on equity appreciation ("growth funds") are stock funds, although a few specialize in other investments such as real estate. Typically, a growth fund's assets include a mix of small, mid-size and large corporation stocks. Fund managers rely on this diversification to limit risk while maintaining strong growth potential.
Some growth funds specialize further. Two popular approaches are to concentrate on foreign stocks or on "green," environmentally-oriented firms. Aggressive growth funds use an asset strategy that accepts higher risk in exchange for greater growth potential. These funds seek out promising, but high-risk stocks and may allocate some assets to stock options to improve returns. - Income mutual funds attempt to generate cash income for investors, rather than concentrating on equity growth. Some invest in preferred stocks that pay high dividends, but still offer some chance of growth, while others focus on bonds. In either case, these funds emphasize a diversified portfolio of low-risk securities. Some bond funds specialize in government bonds (especially municipal bonds) for which the earnings are exempt from federal income tax.
Money market funds are a special form of income mutual fund. To qualify as a money market fund under SEC rules, a fund invests only in short-term corporate or government bonds (with average maturities of 90 days or less). Money market accounts are structured as a hybrid of a checking and savings account, though with better interest rates as a rule. You may write a limited number of checks on the account each month as long as you maintain a minimum balance. - Not all mutual funds fit neatly into one of the above categories. Growth-and-income funds attempt to combine equity growth and income, for example. As a potential investor, you should get a copy of the prospectus of any fund you are eyeing. The prospectus provides a detailed overview of the fund management and investment strategy as well as information on the fund's performance history and fee structure.
Finding mutual fund listings and information is fairly easy. Major financial publications such as the Wall Street Journal and Kiplinger's magazine provide information and analysis. Excellent sources also can be found on the Internet. Two examples are Fidelity.com and Morningstar.com, which provide extensive listings and evaluations of mutual funds.
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