Fund Objectives & Categories
Framing
- We’ve already learned about the characteristics of mutual funds, closed-end funds, and exchange-traded funds (ETFs). This chapter focuses on common fund types.
- 🔑 A fund’s type is usually based on its investment objective and the kinds of securities it holds.
- ⚠️ Some types are easy to tell apart, while others can look similar, so it helps to compare them side by side.
- 📌 These are the most common fund types you’ll see in practice and on this material, especially in suitability questions. You’ll see these fund types again in later sections.
🔑 MASTER TABLE — every fund type named on this page
| Fund type | Objective | Typical holdings | Risk/suitability notes |
|---|---|---|---|
| Growth fund | Capital appreciation — increase the value of holdings over time (buy low, sell higher) | Most often common stock (greatest potential for capital gains); may also include convertible preferred stock and convertible bonds (conversion into common stock creates capital appreciation potential) | Riskier than income funds due to stock price volatility |
| Small-cap growth fund | Growth, via smaller companies | Invests exclusively in smaller companies | Smaller companies = more risk and more growth potential; more vulnerable in downturns, more likely to fail when conditions worsen |
| Large-cap growth fund | Growth, via large established companies | Mostly large, established companies | Can still be moderately risky, but typically less aggressive and less volatile than small-cap growth funds |
| Aggressive growth fund | Higher returns by taking on more risk | Common stock with higher return potential, including small-cap company stock and companies in volatile or emerging industries | Highest-risk growth category |
| Growth & income fund (a.k.a. blend fund) | Capital appreciation plus income | Income-producing stocks: preferred stock and dividend-paying common stock — stock only | Typically more conservative than pure growth funds; dividend-paying stocks generally less risky than growth-focused common stocks |
| Balanced fund | A fairly even mix of growth and income | Growth-oriented common stock AND income-producing securities, including bonds | ⚠️ Balanced funds invest in both bonds and stock; growth & income funds invest in stock only. Don’t mix these up |
| Income fund | Consistent interest and dividend income; capital appreciation is not the primary goal | Only income-producing securities: bonds, preferred stock, dividend-paying common stock | Generally more conservative and less risky than growth funds |
| Corporate bond fund | Income | Corporate issuers’ bonds | A type of income fund |
| Municipal bond fund | Income | Municipal issuers’ bonds | A type of income fund |
| US Government bond fund | Income | US Government issuers’ bonds | A type of income fund |
| High yield bond fund | Higher income | Riskier “junk” bonds with high yields | Higher risk |
| Conservative bond fund | Income with lower risk | Investment-grade bonds | Lower levels of risk and yield |
| International bond fund | Income | Bonds from foreign companies and governments | A type of income fund |
| Ginnie Mae fund | Income | Mortgage-backed securities of Ginnie Mae — Ginnie Mae doesn’t purchase mortgages; it guarantees qualifying MBS issued by approved private lenders | Subject to prepayment and extension risk, but suitable for risk-averse investors seeking conservative investments due to government backing of agency securities |
| Fannie Mae fund | Income | MBS of Fannie Mae — Fannie Mae purchases mortgages from financial institutions | Same: prepayment/extension risk, but conservative/suitable for risk-averse investors due to government backing |
| Freddie Mac fund | Income | MBS of Freddie Mac — Freddie Mac purchases mortgages from financial institutions | Same: prepayment/extension risk, but conservative/suitable for risk-averse investors due to government backing |
| Asset allocation fund | Invest across asset classes based on a chosen allocation | Mix of asset classes, e.g., a 60% stock / 40% bond mix | Some keep a constant mix; others change the mix based on expected market performance or fund requirements |
| Life cycle fund (a.k.a. target date fund) | Adjust over an investor’s lifetime | Start more aggressive (heavier allocation to growth stocks), become more conservative over time by shifting into fixed-income securities | Reflects the suitability principle: as an investor gets older, they generally should take less risk |
| Money market fund | Small amounts of income; cash-like holding | Money market securities = fixed income securities with one year or less to maturity | Low risk, low yield, very liquid (easy to sell); suitable for investors with short-term time horizons |
| Specialized fund | Not defined by growth or income; concentrate on a specific industry or region | Securities from a specific industry or region (e.g., Japan funds, biotechnology funds, Latin American funds) | Risk and return can vary widely depending on the region or industry |
| Sector fund | Concentrate on a specific industry | Industry-specific securities | The name used for specialized funds that focus on a specific industry |
| Index fund | Match the return of a specific index | Securities on the index’s list (e.g., S&P 500) | Passive investing — isn’t trying to pick the “best” securities, just match the index’s performance |
Growth funds
- A growth fund seeks capital appreciation — it aims to increase the value of its holdings over time (buying securities at lower prices and selling at higher prices).
- Growth funds most often invest in common stock because common stock has the greatest potential for capital gains.
- They may also include convertible preferred stock and convertible bonds, since the ability to convert into common stock can create capital appreciation potential.
Sidenote — Capitalization
- Sometimes funds are classified by the size of the companies they invest in. Market capitalization is a common way to measure company size.
🔑 Market capitalization = a company’s outstanding shares × its market value
- Growth funds often describe their strategy using market cap. For example, a small-cap growth fund invests exclusively in smaller companies.
- 📌 Knowing each market capitalization category isn’t heavily tested on this material, but here are the four categories:
| Category | Market capitalization |
|---|---|
| Large cap | More than $10 billion |
| Mid-cap | $2 billion – $10 billion |
| Small-cap | $300 million – $2 billion |
| Micro-cap | Less than $300 million |
- In general, smaller companies tend to have more risk and more growth potential. When a small company performs well in a strong economy, its stock price can rise quickly. But smaller companies are also more vulnerable in downturns and may be more likely to fail when conditions worsen.
- ⚠️ Keep this relationship in mind for test questions: large-cap funds hold mostly large, established companies. Large-cap growth funds can still be moderately risky, but they’re typically less aggressive and less volatile than small-cap growth funds.
Aggressive growth funds
- Aggressive growth funds are growth funds that take on more risk in pursuit of higher returns.
- They typically invest in common stock with higher return potential, including stock of small-cap companies and companies in volatile or emerging industries.
Growth & income funds
- Growth and income funds, sometimes called blend funds, seek capital appreciation but also invest in income-producing stocks.
- These holdings can include preferred stock and dividend-paying common stock.
| Holding | Fact stated |
|---|---|
| Preferred stock | Virtually all preferred stock pays a fixed dividend |
| Dividend-paying common stock | More typical of larger, well-established companies (for example, Walmart) |
- Stocks that provide dividend income are generally less risky than growth-focused common stocks. To pay consistent dividends, a company usually needs consistent profits.
- As a result, growth and income funds are typically more conservative than pure growth funds.
Definitions
| Term | Definition | Example |
|---|---|---|
| Conservative | Low risk | Growth & income funds are more conservative than pure growth funds |
| Aggressive | High risk | Aggressive growth funds take on more risk in pursuit of higher returns |
Balanced funds
- Balanced funds are similar to growth and income funds, but they aim for a fairly even mix between:
- growth-oriented common stock, and
- income-producing securities, including bonds.
Do not mix these up:
| Balanced fund | Growth & income fund | |
|---|---|---|
| Holdings | Bonds AND stock | Stock only |
Income funds
- Income funds invest only in income-producing securities, such as bonds, preferred stock, and dividend-paying common stock.
- Capital appreciation (growth) is not the primary goal. Instead, these funds aim to provide consistent interest and dividend income.
- Income funds are generally more conservative and less risky than growth funds.
Why growth funds are usually riskier than income funds
- The main reason is price volatility in the stock market. Stock prices can move sharply based on business performance and overall economic conditions. If a company has a poor year or the economy enters a recession, common stockholders can experience significant losses.
| Income investment | Why it’s steadier |
|---|---|
| Bonds | Issuers are legally required to pay interest. Bond values typically don’t fluctuate dramatically unless interest rates change significantly |
| Preferred stock | Dividends aren’t a legal obligation, but issuers rarely miss payments unless they’re under serious financial stress |
| Dividend-paying common stock | Larger, established companies with long profit histories often pay cash dividends. Even in difficult markets, these stocks may hold value better than non-dividend growth stocks |
- In general, income-producing investments can help investors reduce volatility and limit large losses.
Types of income funds
| Income fund type | Invests in |
|---|---|
| Corporate bond funds | Corporate issuers |
| Municipal bond funds | Municipal issuers |
| US Government bond funds | US Government issuers |
| High yield bond funds | Riskier “junk” bonds with high yields |
| Conservative bond funds | Investment-grade bonds with lower levels of risk and yield |
| International bond funds | Bonds from foreign companies and governments |
Agency mortgage funds
| Agency | What it does | Investor experience |
|---|---|---|
| Ginnie Mae | Does NOT purchase mortgages — instead, it guarantees qualifying mortgage-backed securities issued by approved private lenders | Investors receive income originating from interest and principal payments on the underlying mortgages |
| Fannie Mae | Purchases mortgages from financial institutions | Same |
| Freddie Mac | Purchases mortgages from financial institutions | Same |
- ⚠️ Trap: Ginnie Mae guarantees; Fannie Mae and Freddie Mac purchase.
- Although subject to prepayment and extension risk, Ginnie Mae, Fannie Mae, and Freddie Mac funds are suitable for risk-averse investors seeking conservative investments due to the government backing of agency securities.
Asset allocation funds
- Asset allocation funds invest across asset classes based on a chosen allocation. For example, an asset allocation fund might hold a 60% stock / 40% bond mix.
| Approach | Description | Example given |
|---|---|---|
| Constant mix | Keeps the same allocation | Fidelity’s Asset Manager 70% Fund — invests 70% of portfolio assets in stocks, with the remaining 30% invested in long and short term debt securities |
| Changing mix | Changes the mix based on expected market performance or fund requirements | Life cycle / target date funds |
Life cycle funds (target date funds)
- Life cycle funds, also known as target date funds, are designed to adjust over an investor’s lifetime.
- They typically start out more aggressive (with a heavier allocation to growth stocks) and become more conservative over time by shifting assets into fixed-income securities.
- 🔑 This reflects a common suitability principle: as an investor gets older, they generally should take less risk.
A common example is the Vanguard Target Retirement 2050 Fund, created for investors targeting retirement around the year 2050. The fund is aggressive right now with roughly 90% of the assets invested in stocks, but the allocation will shift more to bonds and other fixed income securities as time passes.
Money market funds
- Money market funds are a type of income fund, but they generally pay small amounts of income.
- 🔑 Money market securities are fixed income securities with one year or less to maturity, so money market funds are typically low risk and low yield.
| Feature | Detail |
|---|---|
| Common use | Many investors use money market funds similarly to bank savings accounts; when an investor holds cash in an investment account, it’s often placed in a money market fund |
| Share price | Priced at a consistent $1.00 per share |
| Distributions | Typically make monthly dividend payments |
| Investor choice | Reinvest the proceeds to buy more $1.00 shares, or take the payment as cash |
| Liquidity | Very liquid (easy to sell) |
| Income | Provides a small amount of income |
| Suitability | Investors with short-term time horizons |
Specialized funds
- Specialized funds aren’t defined by growth or income objectives. Instead, they concentrate on securities from a specific industry or region.
- Examples: Japan funds, biotechnology funds, Latin American funds.
- Risk and return can vary widely depending on the region or industry.
- 📌 Funds that focus on a specific industry are sometimes called sector funds.
Index funds
- Index funds aim to match the return of a specific index.
- An index is a list of securities designed to track and average the values of the securities on that list.
- A well-known example is the S&P 500, often used as a proxy for “the market.” The S&P 500 is a list of 500 large companies that are traded in the United States.
- Investors use indexes to gauge broad market trends. When the S&P 500 is up, it’s commonly interpreted as the overall market moving upward.
Forms indexes come in
| Index form | Tracks |
|---|---|
| Broad stock market indexes | The overall market (like the S&P 500) |
| Small-cap and large-cap indexes | Smaller and larger companies |
| Bond indexes | Bond values across different issuers |
| Specialized indexes | Specific industries or regions |
- When investors buy an index fund, they’re choosing a fund that isn’t trying to pick the “best” securities. Instead, it’s trying to match the index’s performance.
- This approach is called passive investing, and it has become very popular — now accounting for over 50% of U.S. domestic equity mutual fund and ETF assets under management as of 2024.
Key points
Growth funds
- Objective: capital appreciation
- Invest mainly in common stock; may include convertible preferred stock/bonds
- Market capitalization categories (size = shares outstanding × market value):
- Large cap: >$10 billion
- Mid-cap: $2B–$10B
- Small-cap: $300M–$2B
- Micro-cap: <$300 million
- Smaller companies = more risk + more growth potential; large-cap growth funds less volatile than small-cap
Aggressive growth funds
- Growth funds with higher risk/return targets
- Focus on small-cap stocks and volatile/emerging industries
Growth & income funds (blend funds)
- Combine capital appreciation with income-producing stocks (preferred + dividend-paying common stock)
- More conservative than pure growth funds
- Key terms: Conservative = low risk; Aggressive = high risk
Balanced funds
- Mix of growth stock AND income securities (including bonds)
- Key distinction: balanced funds hold stocks + bonds; growth & income funds hold stock only
Income funds
- Invest only in income-producing securities: bonds, preferred stock, dividend-paying common stock
- Goal: consistent income, not growth
- Generally more conservative than growth funds due to lower price volatility
- Types: corporate, municipal, US Government, high yield (“junk”), conservative (investment-grade), international bond funds
- Ginnie Mae/Fannie Mae/Freddie Mac funds:
- Invest in mortgage-backed securities
- Ginnie Mae guarantees MBS (doesn’t purchase mortgages); Fannie/Freddie purchase mortgages
- Conservative due to government backing; subject to prepayment/extension risk
Asset allocation funds
- Invest across asset classes per a set allocation (e.g., 60% stock/40% bond)
- Can be static or dynamic mix
- Life cycle/target date funds: shift from aggressive (growth stocks) to conservative (fixed income) over time as investor ages
Money market funds
- Type of income fund; invest in short-term (≤1 year) fixed income securities
- Low risk, low yield, highly liquid
- Priced at constant $1.00/share; pay monthly dividends
- Suitable for short-term time horizons, cash-like holdings
Specialized funds
- Focus on specific industry or region (not growth/income based)
- Also called sector funds
- Risk/return varies widely by focus area
Index funds
- Aim to match performance of a specific index (e.g., S&P 500)
- Represents passive investing (vs. active security selection)
- Indexes exist for broad market, cap size, bonds, and specialized sectors
- Passive investing now >50% of US domestic equity fund/ETF assets (2024)
Sources
Primary/official references for the material in this chapter. Every link was fetched and returned HTTP 200 on 2026-08-15.
| # | Source | Publisher |
|---|---|---|
| 1 | Mutual funds and ETFs — NAV, fees, share classes | SEC / Investor.gov |
| 2 | Investment product categories | SEC / Investor.gov |
| 3 | Open-end vs closed-end vs UIT classification | Cornell LII (15 U.S.C. 80a-5) |
| 4 | Achievable Series 65 — chapter 1.3.6 | Achievable (course text) |
84