Funds are broken down into different categories. Fund category is a way of differentiating mutual funds in accordance to investment goals and main investment characteristics. This categorization permits investors to expand their money around in a mix of funds with different risk and return features. With stock funds, the basic categories are defined by the size of the companies in which the fund invests, large-cap, mid-cap and small-cap, and investment style, value, growth and blend of value and growth. In addition, specialty stock funds and international funds provide additional opportunities.
In this article, you will learn a few of the fund categories to help you further widen your knowledge about stock funds.
- Stock fund is categorized by size
You might want to buy stock funds that invest in companies of different sizes, such as small-cap, mid-cap and large-cap companies, for the best diversification process. You can actually do this by selecting three different funds that invest in each sized company, or you can pick one wide fund that invests in all of them at once, maybe through a stock index fund.
- Stock fund is categorized by type
You could invest in a fund that chooses only growth stocks, if you think that small growth stocks will outperform the market. On one hand, you could choose a fund that invests in value stocks, if you truly feel and think that they are the way to go.
- Stock fund is categorized by region
You might also want to buy stock funds that invest in companies, not just in your country, but internationally as well. You can actually do this by adding an international fund to your mix. Just always make sure that you are completely aware what you are buying. An international fund might invest in stable regions like Europe, or it might invest in riskier developing market regions, such as Latin America, Eastern Europe and mainland Asia, or it could be all of the mentioned regions.
- Stock fund is categorized by sector
You could also try to invest in a sector or a specialty fund that holds stocks in just one industry, such as energy, technology or financial. There is nothing wrong with placing a percentage of your total stock holdings to such funds, as long as you remember that a hot sector one year could actually crash the succeeding year. If you do choose to purchase such funds, make sure the rest of your stock fund holdings are well diversified. That will restrict your overall risk.