Types of Mutual Funds

Because different mutual funds have different objectives or goals, they contain different investments in different amounts or allocations. That's a lot of "differents." With so many choices, how do you know what fund or funds are right for you? 

At Edward Jones, we try to simplify these decisions by recommending funds that follow the same principles we believe in: diversification, quality and a long-term perspective. Take a look at the following basic types of funds.

Balanced funds

A fund that combines stocks and bonds is called a "balanced fund." These funds have a predetermined mix of stocks and bonds that are either moderate with more stocks or conservative with more fixed-income investments. The stock/bond mix is defined in the fund's prospectus with a set minimum and maximum percentage for each. 

If you're looking for income and modest growth, a balanced fund may be the right choice for you. But your financial advisor can help you decide.

Equity funds or "stock funds"

An equity fund (also known as a "stock fund") is a type of mutual fund that invests primarily in stocks. Typically, equity funds are defined by the types of stocks they hold.

For example, some stock funds are categorized by the size of the companies they hold, called market capitalization. You may have heard of "small-cap," "mid-cap" and "large-cap" funds, indicating that the fund owns small, medium or large companies. The size of the companies a fund owns is related to how much risk it takes on, because owning smaller, less established companies may be riskier. 

At Edward Jones, instead of focusing on market capitalization, we primarily think of stock funds in terms of their investment style.

  • Growth and income funds — typically pay a dividend, so investors can make money from taking or reinvesting the dividend income and from the growth of the fund itself.
  • Growth funds — usually pay no dividend or a small dividend and instead focus on choosing stocks with growth potential.
  • Aggressive funds — hold more aggressive stocks, like those of smaller or younger companies. Some aggressive funds are considered "specialty funds" because they focus on only one sector such as healthcare, commodities or real estate.

Stock funds can also be categorized by whether most of the holdings are domestic, international or both.

An equity fund's prospectus will detail the types of stocks it owns and in what percentages, as well as its objective. Talk to your local financial advisor and read the prospectus carefully before making an investment decision.

Bond funds

Bond funds invest in bonds (municipal, corporate and government) and other fixed-income type investments, like money market funds or even cash.The exact type of underlying investments in the fund will depend on its focus. 

Because the types of bonds inside a bond fund can vary, you should consider:

  • Duration – How sensitive the fund will be to interest rates, factoring in when interest payments are made as well as the final payment.
  • The credit quality of underlying investments – For example, government bonds are rated AAA, whereas high-yield, or "junk," bonds are those rated BB and below. The percentage mix of the quality of the investments will be defined in the prospectus.
  • Maturity – The average number of years until the par value of the underlying bond will be repaid.

Your financial advisor can help you find the right bond funds to meet your income and diversification needs.

What is a prospectus?

A prospectus is the legal document required by and filed with the Securities and Exchange Commission (SEC).

Because mutual funds are professionally managed, they have a portfolio manager monitoring the underlying investments and making changes as needed, depending on timing, market conditions and other factors. A mutual fund's prospectus will provide the details you need to make an informed investment decision, such as the fund's investment objectives and strategies, risks, past performance, and fees and expenses (how much it will cost you to buy and own the fund).

The prospectus will also spell out exactly how much the fund's underlying investments can vary. For example, a balanced fund's prospectus may specify that it will maintain at least 50% of its value in stock and at least 25% in fixed-income securities.

How we can help

Talk to your local financial advisor about which types of mutual funds may be a good option for you.

Important Information:

Mutual fund investing involves risk. Your principal and investment return in a mutual fund will fluctuate in value. Your investment, when redeemed, may be worth more or less than the original cost.

Edward Jones receives payments known as revenue sharing from certain mutual fund companies, 529 plan program managers and insurance companies (collectively referred to as “product partners”). For more information see Revenue Sharing Disclosure.

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