Stock funds features

Aggressive growth funds: Managers of these funds are
forever on the lookout for undiscovered, unheralded
companies, including small and undervalued companies.
The goal is to get in when the stock is cheap and realize
substantial gains as it soars skyward. That dream doesn’t
always come true. But if you’re willing to accept aboveaverage
risk, you may reap above-average gains.

 Growth funds: These funds are among the mainstays of
long-term investing. They own stocks in mostly large- or
medium-sized companies whose significant earnings are
expected to increase at a faster rate than that of the rest
of the market. These growth funds do not typically pay
dividends. Several types are available, including large-,
medium-, and small-company growth funds.

 Value funds: Managers of these funds seek out stocks
that are underpriced — selling cheaply, relative to the
stock’s true value. The fund’s manager believes that the
market will recognize the stock’s true price in the future.
Stock price appreciation is long term. These funds don’t
typically turn in outstanding performance when the
stock market is zooming along, but tend to hold their
value a
good deal more than growth funds when stock
prices slide. That’s why value funds are generally believed
to be good hedges to more growth-oriented mutual
funds. These funds come in large-, medium-, and smallcompany
versions.

 Equity income funds: These funds were developed to
balance investors’ desires for current income with some
potential for capital appreciation. These fund managers
invest mostly in stocks — often blue chip stocks — that
pay dividends. They usually make some investments in
utility companies, which are also likely to pay dividends.

 Growth and income funds: These funds seek both capital
appreciation and current income. Growth and
income are considered equal investment objectives.

 International and global funds: These two funds may
sound like the same type of mutual fund, but they’re not.
International funds invest in a
portfolio of only non-U.S.
stocks (international securities). Global funds, also called
world funds, can also invest in the U.S. stock markets. In
fact, during the 1990s, many global funds handed in
remarkable performances not because of their international
stock-picking prowess, but because they concentrated
the bulk of their assets in U.S. stocks. This is a
prime example of the importance of understanding how
fund managers are investing your money. I talk more
about how to make this determination in the next section.

 Sector funds: The managers of these funds concentrate
their investments in one sector of the economy, such as
financial services, real estate, or technology. Although
these types of funds may be a good choice after you’ve
already built a portfolio that matches your investment
plan, they have greater risk than almost any other type
of fund because these funds concentrate their investments
in one sector or industry.

If you’re uncomfortable with the potential for significant
losses, make sure that a sector fund only accounts for a
small percentage of your portfolio — say, less than 10%.
Remember, however, that if you invest in a balanced
portfolio, your other investments should hold their own
if only one industry is impacted.

 Emerging market funds: The managers of these funds
seek out the stocks of underdeveloped countries and
economies in Asia, Eastern Europe, and Latin America.
Finding undiscovered winners can prove advantageous,
but an emerging market fund — also known as an
emerging country fund — isn’t a recommended mainstay
for new investors because of the potential for loss.
When these countries and economies suffer economic
decline, they can create significant investor losses.

 Single-country funds: As their name implies, the managers
of these funds look for the stock winners of one
country. Unless you have close relatives running a country
somewhere and have firsthand knowledge about that
land’s economic prospects, you’re wise to steer clear of
these funds. The reason is simple: They have unmitigated
risk from concentration in one area. For example, when
Japan’s economy declined in 1998, it sent mutual funds
that invested exclusively in that country’s companies
tumbling by more than 50%.

 Index funds: The managers of these funds invest in
stocks that mirror the investments tracked by an index
such as the Standard & Poors 500. Some of the advantages
of investing in index funds include low operating
expenses, diversification, and potential tax savings. More
than 150 funds, including growth companies, track a
variety of different indexes. Although they don’t necessarily
rely on the performance of any one company or
industry to buoy their performance, they do invest in
equities that represent a market — such as the U.S. stock
market. If and when that market dips, as the U.S. market
did by 20% in 1987, index funds can be hit pretty
hard.