Understanding Stock Funds: A Guide to Different Types

Investing in stock funds can provide a level of diversification that most individual investors can not get by investing directly in stocks. When it comes to stock funds, there are several different choices for you to consider investing in. Here are a few of the different types of stock funds that are available in the market.

1. Growth Funds

One of the most common types of stock funds is the growth fund. This is a mutual fund that focuses on purchasing only growth stocks. This means that the companies that are purchased for this type of fund are identified by the fund manager as companies that are poised for rapid growth. In order to select growth stocks, the fund manager has to do a great deal of research. In most cases, the fund manager will look at financial statements of the business in order to determine patterns of growth. For example, if a business has exceeded sales projections for consecutive quarters, this is generally an indicator of growth in the future. 

Investing in a growth fund is generally a long-term proposition. If you try to get into and out of a growth fund quickly, you could find yourself losing money. In most cases, you should devote at least five years to investing in this type of fund if you want to be profitable. The ultimate goal of growth funds is to provide capital appreciation for the investor.

2. Value Funds

Another type of stock fund is the value fund. This type of fund aims to purchase value stocks as the underlying asset of the fund. With this type of mutual fund, the fund manager tries to identify companies that are underpriced in the market. The hope of the fund manager is that the mutual fund can purchase a large number of shares of an undervalued company at a discount. Then after the mutual fund makes the purchase, the value of the stock will come back up to where it should be. At that point, the mutual fund will make a profit as the price returns to a normal level. This type of investing also requires a large amount of research on the part of the fund manager.

3. Balanced Fund

Another type of stock fund is the balanced fund. This is a mutual fund that attempts to take advantage of both types of stock trading. Some of the stock in the portfolio will be growth stock, while the other portion of the portfolio will be made up of value stock. The objective of this type of mutual fund is to provide the best of both worlds to investors. You will hopefully be able to receive long-term capital appreciation from the growth stock in the portfolio as well as short-term profits from the value stocks as they increase in value. This type of approach requires a great deal of skill on behalf of the fund manager in order to implement both strategies successfully.