Each mutual fund has a specified investment policy, which is described in the
fund's prospectus. Investment management companies typically manage a family,
or "complex" of mutual funds. They organize an entire collection of
funds and then collect a management fee for operating them. By managing a collection
of funds under one umbrella, these companies make it easy for investors to allocate
assets across market sectors and to switch assets across funds while still benefiting
from centralized record keeping.
Following are some of the more important fund types, classified by investment
policy.
i) Money Market Funds: These funds invest in money market securities
and usually offer check-writing features.
ii) Equity Funds: Equity Funds invest primarily in stocks, although
they may, at the portfolio manager's discretion, also hold fixed-income or other
types of securities to maintain liquidity. It is traditional to classify stock
funds according to their emphasis on capital appreciation versus current income.
Thus income funds tend to hold shares of firms with high dividend yields
that provide high current income. Growth funds are willing to forego
current income, focusing instead on prospects for capital gains.
iii) Fixed-Income Funds: As the name suggests, these funds specialize
in the fixed-income sector. Within the sector, however, there is considerable
room for specialization. For example, various funds will concentrate on corporate
bond, treasury bonds, mortgage backed securities, or municipal bonds.
iv) Balanced and Income Funds: These funds hold both equities
and fixed-income securities in relatively stable proportions.
v) Index Funds: An index fund tries to match the performance
of a broad market index. The fund buys shares in securities included in a particular
index in proportion to the security's representation in the index.
vi) Specialized Sector Funds: Some funds concentrate on a particular
industry like telecommunications, precious metals, utilities etc.
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