Bond Funds invest only in bonds, which are IOUs, or debt, issued by
companies or governments (municipal, state, federal, or another country). Bonds
are debts issued with the promise of full payment in the future and a regular
interest payment that is a fixed percentage, called the coupon rate, of the
amount borrowed. A buyer of a bond is the lender while the bond issuer is the
borrower.
General Equity (Stock) Funds invest in stocks, which represent part
ownership, or equity, in corporations. The goal of stock ownership is to see
the value of the companies go up over time. Stocks are categorized by their
capitalization (or market cap), and come in three sizes: small, medium, and
large. Funds invested in companies can be classified as large-cap, mid-cap, or
small-cap funds depending on company size. Mutual funds may also be categorized
by the type of stock bought and may be called "growth,"
"value," or a combination of the two, called "blend" funds.
Balanced Funds invest in a mix of stocks and bonds. A typical
balanced fund may invest 50-60% of its funds in stocks and the rest in bonds
and cash. It is good to know the distribution of stocks and bonds in a specific
balanced fund to understand the risks and rewards of that fund. Stocks, which
are riskier than bonds, give higher returns.
Global/International Funds invest in companies in other countries.
International funds invest only in foreign companies, while global funds may
invest in some U.S.-based companies in addition to foreign companies. In
general, international funds are much more volatile than domestic funds, which
means the returns can vary wildly up or down from day to day.
Sector Funds invest in one particular sector of the economy like oil,
energy, technology, banking, r real estate. Sector funds are extremely volatile
because events generally affect the same sector in similar ways. For example, a
real estate boom increases the value of a real estate sector fund, while a
collapse does the opposite.
Index Funds match the shareholding of a target index, such as
Standard & Poor’s 500 Composite Stock Price Index (S&P 500) or the
Shanghai Stock Exchange. Index funds differ from actively managed mutual funds
in that they do not involve any stock picking by fund managers – they simply
imitate the returns of the specific index.
Which of the six is a better investment? There is no simple answer, but
knowing a few more features of mutual funds will help you arrive at an answer
to the question.