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Section: 4 Mutual Funds - Investment Policies
Each mutual fund has a specified investment policy, which is described in the fund's prospectus. Investment management companies typically manage a family, or "complex" of mutual funds. They organize an entire collection of funds and then collect a management fee for operating them. By managing a collection of funds under one umbrella, these companies make it easy for investors to allocate assets across market sectors and to switch assets across funds while still benefiting from centralized record keeping.
Following are some of the more important fund types, classified by investment policy.
i) Money Market Funds: These funds invest in money market securities and usually offer check-writing features.
ii) Equity Funds: Equity Funds invest primarily in stocks, although they may, at the portfolio manager's discretion, also hold fixed-income or other types of securities to maintain liquidity. It is traditional to classify stock funds according to their emphasis on capital appreciation versus current income. Thus income funds tend to hold shares of firms with high dividend yields that provide high current income. Growth funds are willing to forego current income, focusing instead on prospects for capital gains.
iii) Fixed-Income Funds: As the name suggests, these funds specialize in the fixed-income sector. Within the sector, however, there is considerable room for specialization. For example, various funds will concentrate on corporate bond, treasury bonds, mortgage backed securities, or municipal bonds.
iv) Balanced and Income Funds: These funds hold both equities and fixed-income securities in relatively stable proportions.
v) Index Funds: An index fund tries to match the performance of a broad market index. The fund buys shares in securities included in a particular index in proportion to the security's representation in the index.
vi) Specialized Sector Funds: Some funds concentrate on a particular
industry like telecommunications, precious metals, utilities etc.