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Mutual Fund Basics

What Are the Different Types of Mutual Fund Asset Classes?

There are many types of mutual funds, each one having its own stated goals and objectives, which are outlined in their prospectuses. One mutual fund may focus on delivering long-term growth of income, and one may focus on long-term growth of capital. All mutual fund investing involves some level of risk, and there are mutual funds created for every level of risk. Keep in mind that mutual funds are not guaranteed or insured by any bank or government agency; you can lose money. Understanding what you want to achieve with your investment and talking with an advisor will help determine what types of funds to invest in to meet your goals. Here are the basic mutual fund types or investment asset classes.

The investment objective and characteristics give an overview of what to expect with each type of fund.

Growth funds

Primarily invest in the stocks of companies that have the potential for above-average gains.

  • The most volatile type of fund. Growth funds tend to rise faster in bull (rising) markets and drop more sharply in bear (falling) markets than other types of funds.
  • Generally better suited for investors with a higher tolerance for risk or for investors with a longer time horizon.

Growth-and-income funds

Typically invest in stocks of companies that pay dividends and have good prospects for earnings growth. These funds also invest in bonds (which provide income).

  • Generally less risky than growth investments because the income from dividends and potentially bonds can cushion the ups and downs from price fluctuations.

Equity-income funds

Invest primarily in dividend-paying stocks and bonds.

  • Because they don’t place their primary emphasis on growth, they tend to produce lower returns (compared to growth funds) during upswings in the market.
  • Their emphasis on income can soften the impact of a stock market downturn.

Balanced funds

Invest primarily in a combination of stocks, bonds and cash equivalents. Seek growth of both capital and income over the long term.

  • They try to offer a diversified mix of investments.
  • Tend to produce more income than growth funds. This can help returns during a stock market downturn.
  • Generally provide lower returns than growth funds during a market upswing.

Bond funds

Invest in bonds and are designed to provide regular income from interest paid by the bonds they hold.

  • Income from bonds can sometimes help investors ride out stock market downturns.
  • Tend to provide lower returns than growth funds during a market upswing.
  • Risks include potential loss if a bond issuer defaults, or fluctuations in price as a result of changing interest rates.

Cash-equivalent funds

Invest in short-term securities such as U.S. Treasury bills and CDs. Although they’re not federally insured or guaranteed, they aim to preserve the initial investment.

  • Typically carry far less risk than other types of investments.
  • Tend to provide the lowest returns of the funds described and may not keep pace with inflation.

Target date funds

Attempt to balance investors’ needs for both growth and stability by automatically adjusting fund holdings as investors near their retirement dates.

  • Designed to serve as a single diversified investment.
  • Holdings are automatically adjusted over time, shifting from a higher percentage of growth funds to a higher percentage of income-oriented funds as retirement date approaches.
  • Will continue to pursue income, capital conservation and some growth after the retirement date is reached.

Portfolio series funds

A mix of mutual funds selected to help investors pursue real-life goals within a framework of such common objectives as preservation, balance and growth.

  • Designed to help investors pursue a wide range of goals based on time frame, risk tolerance and other factors.
  • Offer broad diversification within a single fund.
  • Asset allocations can help target specific investor needs and goals.

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.