AlanKondo-238x300By ALAN KONDO, CFP, CLU

New to mutual fund investing? This primer on fund categories may help you get started. With thousands of mutual funds¹ available today, selecting the most suitable ones for your portfolio can be tricky business. Overwhelmed by the sheer number of funds, new investors understandably may be confused.

Included below is a summary of a number of common mutual fund categories. Once you have some understanding of the different fund categories — which determine the kinds of securities that fund managers select for their funds — the industry’s seemingly endless differentiation may start to become clearer. You — and your Certified Financial Planner™ — can then devise a mutual fund investment strategy that will work for you, bearing in mind your time horizon, risk tolerance, and ability to withstand fluctuations in the value of your portfolio.

● Global and international funds can help diversify your assets into a wide array of foreign stocks and bonds. The difference between the two groups is that global funds include a mix of U.S. and foreign stocks, whereas international funds invest exclusively overseas. Within the two fund groups, there are also regional funds and specific-country funds. Global and international funds vary widely from lower-risk funds that invest in established markets to higher-risk emerging market funds. Be aware that international securities can carry additional risks (such as higher taxation, less liquidity, political problems, and currency fluctuations) that may not affect domestic securities.

● Aggressive growth funds are, as their name suggests, among the most aggressive equity funds. Aimed at maximizing capital gains, these funds invest in companies with the potential for rapid growth (such as companies in developing industries, small but fast-moving companies, or companies that have fallen on hard times but appear due for a turnaround). These funds can be very volatile in the short term, but in the long run they may offer the potential for above-average capital appreciation.

● Growth funds also strive for capital appreciation by investing in companies that are positioned for strong earnings growth. In general, they are less risky than aggressive growth funds because they normally invest in well-established companies. They may entail less volatility than aggressive growth funds, but also less potential for capital appreciation.

● Growth and income funds strive for both dividend income and capital appreciation by investing in companies with solid records of dividend payments and capital gains. Some growth and income funds emphasize growth while others emphasize income. Growth and income funds may be less risky and less volatile than pure growth funds, but may also offer less potential for capital appreciation.

● Sector funds concentrate on one industry (such as technology, financial services, or consumer goods) or focus on certain commodities (such as gold, gas, or oil). Because they are less diversified than the broader market and often more volatile, they are more appropriate for experienced investors willing to pay close attention to the market,

● Balanced funds combine stocks and bonds in a single portfolio. They are more conservative and usually invest in blue-chip stocks and high-quality taxable bonds. They may potentially hold up better in rough markets, because when stocks fall, bonds tend to increase in value. Because they offer a limited amount of diversification, balanced funds are often suitable for people with a small amount of cash to invest.

● Bond funds can be divided into four broad categories: tax exempt, taxable, high quality, and high yield. Within these categories, funds are also segmented by maturities, type of issuer, and credit quality of bonds in which they invest.

● Allocation/lifestyle and target-date funds may be an option for investors looking to simplify their choices. Allocation or lifestyle funds invest in a mix of stocks, bonds, and money market funds. That mix changes over time as you approach the target date, typically your expected date of retirement. For example, a 2040 fund might feature a mix of stocks and bonds that gets progressively more conservative (for example, with more bonds) as you approach year 2040.²

You may be naturally more conservative or growth-oriented, and have your own unique circumstances. Consequently, your Certified Financial Planner™ will ask many questions about your goals and then create a customized allocation designed to accomplish them. He or she will then monitor your progress and make adjustments according to your changing lifestyle, fluctuations in the market, and amendments to tax laws.

¹ Investing in mutual funds involves risk, including loss of principal. Mutual funds are offered and sold by prospectus only. You should carefully consider the investment objectives, risks, expenses and charges of the investment company before you invest. For more complete information about any mutual fund, including risks, charges, and expenses, please contact your financial professional to obtain a prospectus. The prospectus contains this and other information. Read it carefully before you invest.

² Asset allocation does not ensure a profit or protect against a loss in a declining market.


The opinions expressed above are solely those of Kondo Wealth Advisors, LLC (626-449-7783, a Registered Investment Advisor in the state of California. Neither Kondo Wealth Advisors, LLC nor its representatives provide legal, tax or accounting advice.

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