Many investors choose mutual funds as a convenient way to buy securities. Each mutual fund pools money from individual and institutional investors, and that fund invests in a selection of securities that are handpicked to suit its objectives. All shareholders of a fund share proportionately in the fund's gains or losses. Mutual funds are required by the Securities and Exchange Commission (SEC) to provide a prospectus, which discusses a fund's objective, fees, and services, as well as other detailed information.
Stock funds provide the greatest opportunity for growth of your investment capital. With potentially higher returns and a relatively higher level of risk, stock funds are generally used to build up assets over a longer period of time—to save for retirement, build a college fund, or obtain the greatest potential for return over the long-term. Stocks can also provide income through dividends.
Stock funds have more market risk than other types of mutual funds, because stocks are subject to greater market fluctuations. Stock funds invest in ownership shares of companies and corporations and are categorized according to their investment objectives:
- Growth-and-income funds aim for growth of capital and income, by investing in a mix of stocks and bonds or dividend-paying stocks.
- Growth funds aim for growth of capital with moderate risk and typically invest in larger, established companies.
- Value funds try to find companies whose stock price does not reflect their true potential for success.
- Aggressive-growth funds seek growth of capital with higher levels of risk, usually by investing in smaller, emerging growth companies.
- Other stock-fund categories include: small-cap, emerging market, and sector funds.
The broad range of stock funds allows you to tailor investment to your needs. Investors with longer time horizons may be willing to take the greater risks - and greater potential for returns - offered by growth and aggressive-growth funds. Those with shorter time frames might prefer funds with less potential for fluctuation.
Bond (or fixed-income) funds generally provide the most reliable source of income from investment capital. Bonds are similar in principle to loans: the fund lends money to a bond issuer, who promises to repay the principal plus interest. Bond funds can be categorized according to the term of the bonds in which they invest: short (one to three years), intermediate (three to ten years), and long (ten years or more).
There are many different types of bond funds. Some common ones are:
- Municipal bond funds: Invest primarily in securities issued by state and local governments and other municipalities to finance projects such as building schools or repairing roads.
- Corporate bond funds: Invest primarily in bonds issued by companies that want to raise cash for a variety of reasons, such as a factory expansion.
- Government bond funds: Invest primarily in securities issued or guaranteed by the U.S. government and its agencies or instrumentalities.
Funds can also invest in international bonds or high-yield bonds. One type of bond fund that attracts many investors is the tax-free fund, which provides income not normally subject to ordinary federal income taxes.
Bond funds generally:
- Occupy the middle ground of the risk-return spectrum: moderate potential for returns with moderate potential for risk. Shorter-term funds generally involve lower potential for risk and for returns. Longer-term funds have a greater potential for both return and risk.
- Perform in between money market funds and stock funds, delivering returns that outpace inflation but are not as strong as stock fund returns over a long period of time. However, over shorter time periods (and depending on market conditions), bond funds can provide performance equal to some stock funds.
Money market funds are generally used as "safe harbors" for investors who want to receive some income without incurring substantial risk. In addition, investors use money market funds to hold money for emergencies, for anticipated expenses, or for future investment.
All money market funds invest in similar securities—short-term investments that tend to have little price fluctuation. But there are different types of money market funds: government-only funds, non-government funds, and tax-free funds.
Money market funds entail relatively low risk, with little fluctuation in price. In fact, most money market funds are managed to maintain a stable share price of one dollar. In this regard they are similar to bank passbook savings accounts. But money market funds generally provide somewhat better returns.
- Money market funds are not insured or guaranteed by the U.S. government, while bank products may be insured. There can be no assurance that a fund will be able to maintain a stable net asset value of $1.00 per share.
- Investors should expect relatively lower returns than those from either stock or bond funds. Virtually all the return is interest earned on the money market securities in which the fund invests.
- Historically, money market funds have provided returns slightly ahead of inflation.
Selecting Funds Based on Goals and Risk Tolerance
Your time horizon and risk tolerance might dictate which types of funds to consider. For example, the Balancing Risk and Return chart shows how various types of mutual funds balance market risk and the potential for investment return.
Your financial advisor can help you choose mutual funds that match your investment goals and risks. Your advisor may recommend Calvert funds. Our funds are designed to help you achieve financial security and reach your investment goals.
Calvert is a leader in Sustainable and Responsible Investing (SRI). We offer mutual funds that help you achieve your financial objectives while helping to build a sustainable world and protect the quality of life.