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Chapter 11. The Name Game—Understanding ... > Getting to Know the Major Investment... - Pg. 113

The Name Game--Understanding the Different Types of Mutual Funds 113 · · · · · · vary in the amount of risk they are willing to take; however, they generally take less risk than growth funds because the stocks they buy are relatively inexpensive when compared to their peers. Value fund managers might invest in small, medium, or large companies. And these companies might be domestic or international. Stock index fund--Tries to match the return of a specific stock index, such as the Standard & Poor's 400, 500, or 600 Index; Russell 1000, 2000, or 2500; EAFE; and so on. (See Appendix C for definitions.) The objective of an index fund is to perform as well as the stocks that make up the index it reflects. Remember that an index is different from an index fund. Because an index fund is managed and must deduct investment management expenses, its overall return will in most cases be less than the index it represents. Aggressive growth fund--Seeks rapid growth of capital, often through investment in medium and small companies. Some aggressive funds make use of options and futures and/or borrow against fund shares to buy stock. Aggressive growth funds typically provide dramatic gains and losses for shareholders. World or global stock fund--Invests primarily in equity securities of companies located through- out the world. Global funds will usually maintain a fair percentage of assets (normally 25 percent to 50 percent) in the United States. Some global funds can invest entirely overseas. Small company fund--Seeks capital appreciation by investing primarily in stocks of small com- panies, as determined by either market capitalization or assets. International or foreign stock fund--Invests in equity securities of issuers located outside of the United States. Some international funds can invest in the U.S. during adverse market conditions. Company stock fund--Invests in the common stock of your company. These funds allow you to participate in the growth of your employer. Company stock funds are not diversified investments like mutual funds, which makes them theoretically more aggressive than a mutual fund. Where Is Your Money? Small Companies? Large Companies? Listen in on a conversation of investment know-it-alls sometime and you'll hear them use terms like small-cap,mid-cap , and large-cap. Of course, if you asked these people what these terms mean, they probably couldn't explain. If they've done their homework, they would say the word "cap" is an abbreviation for "market capitalization." Now ask them what "market capitalization" means and how you calculate it, and you'll probably get a blank stare. Now don't blow off this section as being too technical, because it really isn't. You should know what capitalization means because it indicates the size of the companies that your stock mutual fund is investing in. Why does size matter? Well, the average size, as well as the type of companies in a mutual fund's portfolio, determines how bumpy a ride you'll have. It will also drive the potential returns you'll get during certain economic conditions. Market capitalization--commonly referred to as capitalization or just "cap"--essentially means the value of a corporation as determined by the market price of its stock. "Cap" is calculated by multi- plying the number of outstanding shares by the current market price of a share. For example, if U- Can't-Lose Enterprises is selling for $50 a share and there are 20 million shares outstanding, then the market capitalization for U-Can't-Lose is $50 × 20 million, or $1 billion. If a stock mutual fund owns shares in this company and many other companies of similar size, then the median (or middle point) capitalization for this fund is $1 billion. According to our descriptions below, this is a small-company stock fund. · Small capitalization funds--Generally funds with a median market cap of up to $2 billion · Medium capitalization funds--Generally funds with a median market capitalization between $2 and $7 billion