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Chapter 11. The Name Game—Understanding ... > Getting to Know the Major Investment... - Pg. 110

The Name Game--Understanding the Different Types of Mutual Funds 110 A GIC (guaranteed investment contract) is a contract between an insurance company and a qualified retirement plan, like a 401(k). The contract guarantees a specific rate of return (i.e., stable value) over a specified period of time. The insurance company's job is to invest this money at a higher return than it's guaranteeing. Fixed-Income Investments This category includes investments such as guaranteed investment contract ( GIC ) and intermediate and long-term corporate and government bonds. Preferred stock is also considered a fixed-income investment. With preferred stock you become an owner of the company, but forsake your desire for growth. Instead you buy preferred stock for its guaranteed dividends, which promise a predeter- mined rate of return. Most bond mutual funds have a variety of fixed-income investments in them, so you really need to read the prospectus to figure out what's in there. Remember that fixed-income investments are affected by long-term interest rates. When rates go up, the value of the bonds in the mutual fund will go down. Bond mutual fund owners get confused when they look at their quarterly statements and see neg- ative returns. Because they bought the fund for income, they can't understand why the share price of the fund went down. Here's why. At the end of every business day, mutual funds (stock and bond) calculate the total value of their portfolios (stock or bond market price, shares held, expenses, etc.). This produces the net asset value (NAV) or "share price" of the fund. A bond mutual fund's value is determined by what the open market would pay for the bonds in its portfolio. If interest rates are heading higher, there is a good chance the fund's share price will go down, and vice versa. Asset Allocation Funds and Balanced Funds