Mutual Funds

Source: yahoo.com

There are three types of mutual funds:

Growth funds are those that "grow" your money. "As their name implies, these funds tend to look for the fastest-growing companies on the market. Growth managers are willing to take more risk and pay a premium for their stocks in an effort to build a portfolio of companies with above-average earnings momentum or price appreciation." Expenses tend to run high, as does risk.

Value funds "These funds like to invest in companies that the market has overlooked." Fund managers "search for stocks that have become 'undervalued' -- or priced low relative to their earnings potential." Expenses tend to be low. Good for the conservative investor.

Blend funds are a combo of both growth and value. "They might ... invest in both high-growth Internet stocks and cheaply priced automotive companies. As such, they are difficult to classify in terms of risk." Remember, hundreds of different companies can make up one mutual fund.

Size groupings

Source: yahoo

Beyond the classifications of growth, value, and blend, mutual funds can be further separated into large-cap, mid-cap, and small-cap, based on the size of the companies they are invested in:

Large-cap funds invest in large companies -- brand names that are internationally recognized. These are usually solid performers. "Large-capitalization funds generally invest in companies with market values of greater than $8 billion. Some, like the Vanguard 500 Index fund, merely mimic the index and invest in all 500 companies." Lower risk.

Mid-cap funds: "As the name implies, these funds fall in the middle. They aim to invest in companies with market values in the $1 billion to $8 billion range -- not large caps, but not quite small caps, either. The stocks in the lower end of their range are likely to exhibit the growth characteristics of smaller companies and therefore add some volatility to these funds. They make the most sense as a way to diversify your holdings." Moderate risk.

Small-cap: "A small-cap fund ... will focus on companies with a market value below $1 billion. The volatility of the fund often depends on the aggressiveness of the manager. Aggressive small-cap managers will buy hot growth and technology companies, taking high risks in hopes of high rewards. More conservative "value" managers will look for companies that have been beaten down temporarily by the stock market. Value funds aren't as risky as the hot growth funds, but they can still be volatile." Higher risk.

A well-diversified portfolio will have a percentage of each of these types. Look for a 9-square chart like this one:
Vanguard has more info on the stock square chart:


Try to spread your mutual funds across this 9-square chart. Have some small-cap blends, large-cap value, mid-cap growth, etc. Diversity, diversify, diversify!

When buying:

Look for no-load funds.
Look for low expenses.
Look for low tax-ratios.

Look up ticker symbols at morningstar or yahoo to find out about expenses and tax ratios. Companies that sell mutual funds (Vanguard or American Century) will have information about whether a fund is no-load or not.