FUND TYPES BY ASSET CLASS
Learning how mutual funds are categorized helps investors select a mutual fund that is consistent with their asset allocation model. The follow information includes asset classes as defined by Morningstar. We provide the following information to help you assess potential risks.
*Chart is for illustrative purposes only. Not intended to recommend any particular allocation.
Allocation funds are a combination of stock and fixed income securities and are subject to the risks involved in each of these security types. Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. In general, the bond market is volatile, and fixed income securities carry interest rate, inflation, price volatility and other risks.
Alternative funds may invest in securities that may have a leveraging effect (such as derivative and forward-settling securities) which may increase market exposure, increase investment risks, and cause losses to be realized more quickly. The strategies alternative mutual funds employ tend to be complex. Examples include hedging and leveraging through derivatives, short selling and opportunistic strategies that change with market conditions as various opportunities present themselves, and therefore should be deemed as high risk.
Commodity mutual funds typically invest in commodity goods including, but not limited to, grains, minerals, metals, livestock, cotton, oils, sugar, coffee and cocoa. The commodities industry can be significantly affected by commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions, and therefore may not be appropriate for investors with a low risk tolerance.
International equity funds typically strive for diversification by offering investors the opportunity to invest in developing economies that are exhibiting growth, or growth potential, that is greater than the domestic economy. Investing in foreign securities presents certain unique risks not associated with domestic investments, such as currency fluctuations and changes in political, regulatory or economic conditions. All of these factors may result in increased volatility. These risks are particularly significant for funds that focus on a single country or region.
An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. Although funds seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in a money market fund. In general, the purpose of a money market fund is to provide investors with a safe place to invest easily accessible cash-equivalent assets characterized as a low-risk, low-return investment.
Municipal bond funds invest in municipal bonds, which are debt securities issued by a state, municipality, county, or special purpose district (public schools, airports, etc.) to finance capital expenditures. They are exempt from federal tax, and are generally exempt from state taxes for residents of the state in which they are issued. The municipal market can be affected by adverse tax, legislative or political changes and the financial condition of the issuers of municipal securities. Interest rate increases can cause the price of a municipal bond to decrease.
Sector Equity mutual funds typically invest solely in businesses that operate in a particular industry or sector of the economy. That the holdings of this type of fund are in the same industry indicates an inherent lack of diversification associated with these funds. Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. Therefore, sector funds can be more volatile because of their narrow concentration in a specific industry.
A Taxable Bond fund invests in debt securities that are subject to taxes at the local, state or federal level, or some combination thereof. In general, the bond market is volatile, and fixed income securities carry interest rate risk. As interest rates rise, bond prices usually fall, and vice versa. Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.
U.S. Equity funds usually seek long-term capital appreciation by investing a large percentage of its net assets in equity investments that are tied economically to the U.S. All stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal.