Fund objectives and style


Each mutual fund has an investment objective — a goal or financial result it wants to realize. And each fund manager has an investment style, which is the approach he or she follows in making investments to achieve the fund’s goal.

Most fund objectives fit into one of several broad categories, such as growth in value, current income, or a combination of growth and income. For example, a growth fund selects investments that seem likely to increase in value over time. An income fund, on the other hand, targets investments that it expects to generate revenue, such as stock dividends.

Styles are harder to classify than objectives, since many factors contribute to the way a manager makes investment decisions. But there are several well-recognized approaches, including styles that stress growth, those that stress value, and those that stress capital preservation.

The fund’s objective

When a stock mutual fund defines its investment objective, it is identifying a specific type of stock — though not individual stocks — that will be the core of its portfolio.

Sometimes the objective is quite broad. For example, the manager of a fund whose objective is long-term growth may look for a range of companies whose current market capitalization is small — less than $1.5 billion — because he or she believes they have the potential to increase significantly in value over several years.

Other times, the objective may be quite focused and reflect social, political, or religious interests. For example, some socially conscious funds buy stock in companies whose products and services are acceptable to investors who want to avoid tobacco, firearms, gambling, or a range of other activities. Others, called green funds, buy only the stocks of environmentally friendly companies.

Fund names

Judging a mutual fund by its name — like judging a book by its cover — can produce some surprises. However, the Securities and Exchange Commission (SEC) does require a fund that describes itself in a particular way — as a growth and income fund, for example, or as a US large-cap fund — to invest at least 80% of its assets in the type of investments suggested by its name. And companies that track mutual funds, including Lipper, Inc. and Morningstar, Inc., categorize and evaluate funds by the types of investments they make.

Handling capital

The money you invest in a mutual fund is called your capital. If this base amount increases in value, the growth is called capital appreciation.

Every mutual fund, especially those whose objective is capital appreciation, carry some risk that the value of your investment will shrink. This possibility is known as the risk to capital.

Your capital may be at risk for one of two reasons:

  • The fund’s underlying investments may drop in value
  • The fund might have to sell investments at a loss to meet its obligation to buy back shares from investors who want to sell

Some other funds try to minimize risk to capital by concentrating their investments in established companies that have historically paid steady dividends and seem unlikely to drop dramatically in value. These funds often use the phrase capital preservation in defining their investment objective.

Investing style

Many funds share an investment objective, such as long-term growth or growth and income. But those funds are likely to produce different results, both in the short term and over longer periods. That’s because the managers who make the fund’s buy and sell decisions follow different investment styles.

For example, one manager might pursue capital appreciation by buying undervalued stocks in mature companies whose prices are low because their products or services are out of favor with investors, or they have had management or other problems. The manager’s expectation is that some or all of the prices will rebound and increase the value of the fund. This style is described as value investing.

Another manager seeking similar results might concentrate on stocks issued by new or small companies, or those in a certain sector of the economy. While these stocks are likely to be more volatile, carry more risk, and perhaps be less expensive than others, the manager anticipates they will continue to increase in value. This style is described as growth investing.

While both investment styles can produce strong results in certain markets, they rarely do so at the same time. In the same vein, neither investment style can prevent losses in a down market.

 

 

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