The securities that exist in today’s financial markets can be divided into four main classes: stocks, bonds, cash, and foreign holdings, with the first two representing the major part of most portfolios. These categories can be further subdivided by “style.” Let’s take a look at these classes in the context of mutual fund investments:
Equity Funds: The style of an equity fund is a combination of both (1) the fund’s particular investment methodology (growth-oriented, value-oriented or a blend of the two) and (2) the size of the companies in which it invests (large, medium and small). Combining these two variables – investment methodology and company size – offers a broad view of a fund’s holdings and risk level. Thus, for equity funds, there are nine possible style combinations, ranging from large capitalization/value for the safest funds to small capitalization/growth for the riskiest.
Fixed Income Funds: The style of a domestic or international fixed-income fund is to focus on the two pillars of fixed-income performance – interest-rate sensitivity (based on maturity) and credit quality. Thus, fixed-income funds are split into three maturity groups (short-term, intermediate-term, and long-term) and three credit-quality groups (high, medium and low). These groupings display a portfolio’s effective maturity and credit quality to provide an overall representation of the fund’s risk, given the length and quality of bonds in its portfolio.
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