Targeted Investments

Every mutual fund — stock, bond, or money market — is established with a specific investment objective that focuses on one of three basic goals:

Future growth
Current income
Both income and growth

To achieve its objective, the fund invests in securities it believes will produce the results it wants. To identify those securities, a fund often does a vast amount of research, often using what's known as a bottom-up style, which involves analyzing individual companies. When the objective is small-company growth or the focus is on emerging markets, the process can be more difficult because there's limited information readily available.

In addition, each fund manager has a buying style, seeking a particular type of investment from the pool that may be appropriate for the objective. Some equity-fund managers, for example, stress value, which means buying stocks whose prices are lower than might be expected. Other managers may be contrarians, buying investments that others are shunning.

THE RISK FACTOR
There is always the risk that a fund won't hit its target. And some funds are, by definition, riskier than others. For example, a fund that invests in small new companies takes the chance that some of its investments will do poorly because it believes that some, at least, will do very well. In contrast, other funds work to moderate risk by balancing their investments between stocks and bonds.

FUNDS TAKE AIM
These charts group funds in three basic categories by investment objective. They also illustrate the correlation between a fund's objective and the risks it may face.

INCOME FUNDS

Kind of fund	Investment objective	Potential risks	What the fund buys
Agency bond	Income and regular return of capital	Value and return dependent on interest rates	Securities issued by US government-sponsored agencies and related institutions
Corporate bond	Steady income	Interest-rate changes and inflation	Highly rated corporate bonds, with various maturities
High-yield bond	Highest current income	High-risk bonds in danger of default	Low-rated and unrated corporate government bonds
International and money market	Income and currency gains	Changes in currency values and interest rates	CDs and short-term securities
Municipal bond	Tax-free income	Interest-rate changes and inflation	Municipal bonds in various maturities
Short-/ intermediate-term debt	Income	Small risk of loss. Less influenced by changes in interest rate	Different types of debt issues with varying maturities, depending on type of fund
US Treasury bond	Steady income	Interest-rate changes and inflation	Highly rated government bonds

GROWTH AND INCOME FUNDS

Kind of fund	Investment objective	Potential risks	What the fund buys
Balanced	Income and growth	Limited risk to principal. Moderate long-term growth	Part stocks and preferred stocks (usually 60%), and part bonds (40%)
Equity income	Income and growth	Limited risk to principal. Moderate long-term growth	Blue chip stocks and utilities that pay high dividends
Growth and income	Growth plus some current income	Limited risk to principal. Moderate long-term growth	Stocks that pay high dividends and show good growth
Income	Primarily income	Limited risk of loss to principal, but less growth in strong market	Primarily bonds, but some dividend-paying stocks

GROWTH FUNDS

Kind of fund	Investment objective	Potential risks	What the fund buys
Aggressive growth funds, also called capital appreciation	Long-term growth	Very volatile and speculative. Risk of above-average losses to get above-average gains	Stocks of new or undervalued companies expected to increase in value
Emerging markets	Growth	Typically more volatile than other growth funds	Stock in companies in developing countries
Equity index	Imitate the stock market	Average gains and losses for the market the index tracks	Stocks represented in the index the fund tracks
Global equity	Global growth	Gains and losses depend on stock prices and forex fluctuations. Some risk to principal	Stocks in various markets
Growth	Above-average growth	Can be volatile. Some risk of loss to principal to get higher gains	Stocks in mid-sized or large companies whose earnings are expected to rise quickly
International equity	International growth	Potentially volatile, based on currency fluctuation and political instability	Stocks in non-US companies
Sector	Growth	Volatile funds dependent on right market timing to produce results	Stocks in one particular industry, such as energy or transportation
Small company growth	Long-term growth	Volatile and speculative. Risk of above-average losses to get higher gains	Stocks in small companies traded on the exchanges or over the counter
Value funds	Growth	Often out of step with overall market	Stocks in companies whose prices are lower than they seem to be worth

HEDGING
International fund managers may use a practice called hedging in an effort to protect the return on their funds. They hedge because if a currency gains value in relation to others, investments denominated, or sold, in those other currencies have less value when they are converted into the stronger currency. That could result in losses in the fund. So a mutual fund might buy futures contracts on a currency in which it holds investments at preset exchange rates.

However, while hedging can be a useful tool, there's no guarantee that the situation the fund anticipates will occur while the hedge is in force, or that the hedge the fund uses will provide the cushion against loss that it seeks.

Funds that hedge may put up to 50% of their total assets in currency contracts rather than stocks or bonds. But other funds don't hedge at all, figuring that exposure to other currencies is part of the reason for investing overseas.

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