Each mutual fund has an investment style that the mutual fund is required to outline in the fund’s prospectus, and often reflected in the fund’s name. A typical way of categorizing the mutual fund styles include:
Although the fund’s investment style may seem pretty clear, to the point of most data services classifying funds pretty narrowly, such as Large-cap Growth, an investor should realize that a fund manager generally has quite a bit of latitude in how they invest.
For example, Fidelity’s Magellan fund was clearly a growth mutual fund. Managed by Peter Lynch, this fund was one of the top-performing growth funds of the 1980s. But in the mid-1990’s under the direction of Jeff Vinick, Magellan experienced a series of missteps that went contrary to Magellan’s investment objective. In particular, in 1996, Vinick felt that the market was at its peak. So instead of staying in equities, where one would expect an equity growth fund to be invested, Vinick sold 40% of the Magellan’s equity position and invested in long-term bonds and cash. His timing could not have been worse. He missed the beginning of a record-breaking, multi-year stock market rally. Instead, he was invested in the year’s worst-performing asset class, long-term bonds. This deviation from Magellan’s objective as a growth fund caused Magellan to trail the S&P 500 by 18.5 percent.
Although investors complained and felt duped by Vinick’s investment choices, he had invested within the parameters of Magellan’s prospectus. Of course, it is doubtful that the investors would have criticized Vinick’s bet on bonds if it turned out to be accurate. Nonetheless, most investors felt that as a growth fund, Magellan should have stayed invested in equities.
As a result of the wide latitude in investment styles that are generally allowable by mutual funds’ prospectuses, we have narrowed down the investment styles to the following broader styles:
In the Sections below, we describe in more detail each of the investment styles used by MutualFundAlliance.com.
Growth funds are mutual funds that generally invest in growth-oriented stocks and are for investors with a long-term time horizon. These funds historically experience less volatility than the sector funds, but more volatility than balanced and income funds. Within growth funds there are multiple additional investing styles such as aggressive growth and value.
Aggressive growth funds are normally the riskiest type. They seek capital appreciation and often use investment techniques such as short selling, leveraging, frequent trading, and small cap equities. Because of their growth focus, they reinvest earning in the company and therefore do not produce significant interest income or dividends.
Value funds typically invest in companies that are undervalued relative to their market price. Value fund managers typically analyze the stock’s underlying fundamentals to make judgments as to the stock’s value and estimates that at some point, the market will correct for this low price.
An index fund is a passively managed fund that matches the performance of a widely known index. This is accomplished by holding either all of the securities in an index in the appropriate proportions or by holding a statistically selected sample of securities that closely tracks the desired index.
Online Resources: Growth Funds
· Fidelity Growth Funds
· Vanguard Growth Funds
· T Rowe Price Growth Funds
· Janus Growth Funds
· Yahoo Finance
· Large-Cap Growth
· Mid-Cao Growth
· Small-Cap Growth
Balanced funds are designed to provide more shelter from risk than growth funds through investing in a “balance” of stocks and bonds. Over the years the spectrum of balanced funds have significantly increase as asset allocation and targeted asset allocation funds have increased in popularity.
The equity portion of balanced fund portfolios are often represented by larger-cap stocks. As a result of their more conservative and balanced portfolios, these funds are typically less volatile than growth funds. In addition, the managers of balanced funds often re-balance their portfolios between stocks and bonds as their outlook for the markets change – over-weighting in stocks during bull markets and investing heavily in bonds during bear markets. In addition, MutualFundAlliance.com also classifies equity income funds within the balanced category since equity income fund managers typically invest at least fifty-percent of their assets in stocks with above-average yields.
Online Resources: Balanced Funds
· Fidelity Balanced Funds
· Vanguard Balanced Funds
· T Rowe Price Balanced Funds
· Janus Balanced Funds
· Yahoo Finance
· Large-Cap Blend
· Mid-Cap Blend
· Small-Cap Blend
There are several basic kinds of bonds funds:
· Corporate – These generally invest in corporate bonds of investment grade quality. Because the bonds are investment grade, the corporate bond funds are considered a fairly safe investment.
· Junk/ high-yield – High-yield funds invests in corporate bonds of lower quality ratings, and can therefore provide higher returns.
· Government – Government funds invest in bonds issued by the US Treasury and Agencies. These funds are an extremely safe investment.
· Tax advantaged – These funds invest in securities issued by state and local government entities. The interest earned is generally exempt from federal income taxes and in some cases state and local taxes. They offer many of tax advantages that can offset the lower returns the bonds provide.
Online Resources: Bond Funds
· Fidelity Bond Funds
· Vanguard Bond Funds
· T Rowe Price Bond Funds
· Janus Bond Funds
· High-Yield Bonds
· Intermediate-Term Corp. Bonds
· Long-Term Corp. Bonds
· Short-Term Corp. Bonds
· Intermediate-Term Gov’t Bonds
· Long-Term Gov’t Bonds
· Short-Term Gov’t Bonds
· International Bonds
For those looking to invest beyond US borders, International funds can be a fantastic option. International funds are either stocks (equity) or bond funds.
· International Equity – These funds invest heavily in foreign stocks. Depending on the fund, US stocks may or may not be held.
· International Bond – International bond funds invest primarily in non-US currency denominated debt, which are frequently obligations of foreign governments or agencies.
Online Resources: International Funds
· Fidelity International Funds
· Vanguard International Funds
· T Rowe Price International Funds
· Janus International Funds
· World Stock Funds
· International Emerging Markets
· Diversified Pacific Stock
· European Stock
· Latin America Stock
Specialized funds allow investors to focus on a specific industry, or sector, including Finance, Health Care, Natural Resources, Precious Metals, Technology, and Utilities. Single Country Funds are funds that focus on one particular country. They are typically used for international diversification. Unfortunately, most sector funds charge an up-front sales fee. In the section below, we discuss alternative ways to invest in sector funds without paying a sales charge.
Online Resources: Sector Funds
· Fidelity Sector Funds
· Vanguard Sector Funds
· T Rowe Price Sector Funds
· Janus Sector Funds
· Natural Resources
· Precious Metals
· Real Estate
As our long-time members are aware, the MutualFundAlliance.com doesn’t advocate purchasing mutual funds that have either front-end or back-end loads. Front-end load is a commission that is sometimes charged at the time of purchasing a mutual fund from fund companies and will almost always be charged when you buy funds through a broker. Likewise, back-end load is a sales commission that is paid at the time you sell a mutual fund.
Generally speaking, there is never a reason to choose to invest in a mutual fund that charges a load. Within the Fidelity, Vanguard, Janus, and T Rowe Price mutual funds that we rate with Buy, Hold, and Sell ratings, there are hundreds that do not charge a sales load.
Unfortunately for investors of Sector funds, the Fidelity Select funds charge a 3 percent front-end load. It is important to note that once you have purchased a Select Fund from Fidelity and paid your 3 percent front-end load, you can trade that fund for another Fidelity Select fund without re-paying the load. As long as you keep that money within a Fidelity account, Fidelity tracks that money and will not charge you a load again. But be careful to track this because if you trade your investment from a Select fund into another Fidelity fund, you may forget which money for which you already paid a load. Some investors keep their Fidelity Select portfolio in a separate investment account to avoid any confusion and risk of paying more in loads than is necessary.
On the other hand, it is possible to invest in Sector Funds without paying loads, including:
The MutualFundAlliance.com tracks 15 no-load Sector Funds. These include:
Like all mutual fund investing, before investing in these funds, it is important to carefully analyze these funds’ fundamentals and compare these to their counterparts from Fidelity. It is our experience that these funds do not track the performance of their Fidelity counterparts. There are times when the Sector funds from Vanguard, Janus, and/or T Rowe Price perform better and/or perform worse than their Fidelity counterparts. In the MutualFundAlliance.com daily outlook, we follow the performance of these funds and compare their performance to the best performing and worst-performing funds of the day.
When investing in funds, including sector funds through a brokerage account, be careful as to any transaction fees charged by the brokerage company. For example, in a Fidelity Brokerage account, Fidelity charges a $75 dollar transaction fee for some non-Fidelity funds, such as Vanguard funds.
To non-Fidelity Sector funds, there is a way to purchase Fidelity funds without paying a sales load. Fidelity has a program for Registered Investment Advisors through Fidelity’s Fidelity Investment Advisor Group. Through this division of Fidelity, Fidelity makes a limited number of Sector Funds available without a sales load. The catch is that when using an Investment Advisor, they often charge a fee for their advice, ranging from 0.5% to 2.0% per year.
Money market funds invest in short term government, corporate or bank issued debt. The objective is preservation of capital while maintaining a stable price of one dollar a share.
In addition to the more popular open-end mutual funds and close-end mutual funds described above, there are additional types of mutual funds.
Online Resources: Additional Information on Other Mutual Fund Types
· Exchange-Traded Funds
· Socially Responsible Funds
o Calvert Group : http://www.calvert.com/
· Hedge Funds