Common types of mutual funds
Equity mutual funds invest primarily in stocks, which are essentially shares in the ownership of a company. These funds may be actively or passively managed. With actively managed equity funds, the portfolio manager selects each investment held by the fund. In contrast, passively managed equity funds are designed to track a specific equity index. Whether actively or passively managed, equity funds may invest in a broad range of equities across sectors, regions and market capitalizations.
Regardless of the fund’s specific holdings, the goal of most equity funds is to provide investors with long-term capital growth, as equities historically have higher rates of return than fixed-income securities. Keep in mind, however, that a higher potential return typically means a higher level of risk as well.
Balanced mutual funds invest in a mix of equity and fixed-income securities. They may also hold cash. Like pure equity and fixed-income funds, balanced funds can invest broadly across equity sectors and different types of bonds, or can specialize in specific areas of the market. One thing to note is that the word “balanced” does not mean a fund has to invest in 50% equities and 50% fixed income. A fund may invest more heavily in one asset class or the other depending on its investment objectives and/or the market environment.
Balanced funds typically aim to provide long-term growth, income and capital protection. They are considered a more diversified investment than pure equity or fixed-income funds because bond returns and stock returns do not usually move in tandem. This diversification can help reduce fund volatility and provide a smoother ride for investors over the long term.
Fixed-income mutual funds mainly invest in bonds and money-market instruments. They tend to hold a higher amount of cash or cash equivalents than equity funds. Like equity funds, fixed-income funds can be actively or passively managed.
In general, fixed-income funds aim to generate cash flow and focus on preserving an investor’s capital, whether over the short or long term. They typically provide lower overall long-term returns than equity funds but have a lower level of risk.
Sector mutual funds are equity funds that focus on one specific sector or area of the market. For example, an equity fund that invests primarily in the energy sector would be considered a sector fund. These funds typically have higher risk than equity funds that invest across a range of sectors, because stock prices for companies within a specific sector tend to move more in line with each other as they can be impacted by specific market events.
Sentry offers equity, balanced, fixed-income and sector funds. To learn more, speak with your financial advisor today or call Sentry Client Services at 1-888-698-5553.