Mutual Fund Investment Styles

Aggressive Growth

Aggressive growth mutual funds use money managers to seek out the most undervalued stocks, and the ones with the strongest potential for future growth. Aggressive growth funds can also invest in new companies, and smaller firms the managers feel have the potential for explosive growth in the future. These funds tend to have a high turnover ratio, which can in turn create a lot of capital gains and the resulting taxes. As a result, many investors prefer to keep these funds in their tax-deferred accounts, where taxes are not an issue.

Growth and income funds try to strike a balance between stocks with a good potential for growth and stocks that provide current income. The money managers at these funds look for dividend-paying stocks, particularly ones that have a good history of raising dividends year after year. The managers also look for stocks that they feel are overvalued, and those they believe have a higher potential for growth than the overall market.

Index funds do not attempt to time the market or outperform it. Instead, they simply buy and hold all of the stocks in a given index. Some of the most popular index mutual funds track the performance of the Standard and Poor's 500 index, while others track the Russell 5000 and even the tech-heavy Nasdaq 100. Index funds typically have lower expenses, since they do not have to hire money managers to pick and choose stocks. Index funds also tend to generate fewer capital gains, making them a very tax-efficient way to invest.

Balanced funds typically include a mixture of stocks and bonds, often at around a 50/50 ratio. These funds seek to offset the volatility of the stock market by including high-quality bonds as part of their portfolios. The bond portion of the portfolio can also produce current income, although the yields vary from fund to fund. Investors who are interested in this type of fund should check the expenses carefully, and assess how well the fund has done in both up and down markets.