Equity funds VAS Bond funds

The primary focus of equity funds is to invest in common stock. Within equity funds, we find different objectives. Growth funds invest in companies likely to grow their profits faster than competitors and/or the overall stock market. These stocks usually trade at high P/E and price-to-book ratios.

Value funds, on the other hand, seek companies trading for less than the portfolio managers determine they're truly worth. These funds buy stock in established companies currently out of favor with investors. Since the share price is depressed, value stocks tend to have high dividend yields. Value funds are considered more conservative than growth funds.

What if he can't make up his mind between a growth fund and a value fund? There are funds that blend both styles of investing, and the industry calls these blend funds. In other words, no matter how creative the portfolio managers might get, they end up being either a growth fund, a value fund, or a blend of both styles.

If an investor's objective is to receive income from equities, an equity income fund may be suitable. These funds buy stocks that provide dependable dividend income. Receiving dividends tends to reduce the volatility of an investment, so equity income funds are lower risk than growth funds. They may also invest in debt securities to keep the yield consistent.

What if the investor can't decide between a mutual fund family's growth funds and its income funds? Chances are, he will choose their "growth and income fund." A growth and income fund buys stocks in companies expected to grow their profits and in companies that pay dependable, respectable dividends. Since we've added the income component, growth and income funds have lower volatility than growth funds. Many allocate a percentage to fixed-income to assure a regular source of dividend distributions to the shareholders.

So, from highest to lowest volatility, we have growth, then growth & income, and then equity income funds.

Bond funds (Fixed-Income funds)
Stock is not for everyone. Even if an investor owns equity mutual funds, chances are he will put a percentage of his money into bond funds, as well. If the investor is not in a high tax bracket, we'll recommend taxable bond funds corporate and U.S. Government bonds.

The investor's time horizon determines if she should purchase short-term, intermediate-term, or long-term bond funds. Her risk tolerance determines if she needs the safety of U.S. Treasury funds or is willing to reach for higher returns with high-yield funds. If the investor is in a taxable account and wants to earn interest exempt from federal income tax, her agent might put her into a tax-exempt bond fund, which purchases municipal bonds. If the investor is in a high-tax state such as Maryland, Virginia, or California, she might want the "Tax-Exempt Fund of Maryland," Virginia, or California. Now, the dividends she receives will be exempt from both federal and state income taxes.

Whichever tax-exempt fund she chooses, the next question is, "How much of a yield does she want, and how much risk can she withstand?" Her answers determine how long the average maturity of the fund, and whether to focus on high-yield or investment-grade bond funds.


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