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Thursday, November 9, 2017

Alpha Teach Yourself Investing in 24 Hours: An Analysis (part 18)


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Mutual Funds (part C)
by
Charles Lamson


Stock Mutual Funds

The different types of stock mutual funds are:
  • Growth funds
  • Income funds
  • Value funds
  • Cyclical and sector funds
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Growth Funds

Growth funds invest in stocks that are expected to appreciate over time. These stocks often do not pay dividends electing rather to plow profits back into the company to finance further growth.

Stock mutual funds look for companies that have the potential to grow at a steady rate for many years. Companies in dying industries or companies with management out of step with the market will be rejected. For example, the U.S. steel industry, led by the company U.S. Steel, was an icon for America's manufacturing greatness, but high energy costs, high labor costs, and foreign competition doomed the industry.

When you invest in a growth fund, you are expecting your returns to come over a long period of time in the form of price appreciation. A well-managed growth fund will not have a large turnover in its portfolio. If the manager has chosen correctly, the fund will ride a good growth stock for the long term.

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Growth funds that do not grow often find money leaving the fund, which forces the manager to sell in what may be a stagnant or declining market for the fund's particular holdings, further driving down the fund's value.

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However, most growth funds have criteria that say when a stock has failed to meet certain parameters for a specified period it may be dropped from the fund, even if it has produced a gain. These events will trigger tax consequences for the investor, so many choose to put growth funds into tax-deferred (retirement) accounts.


Income Funds

Income funds are fairly self-explanatory. These mutual funds buy stocks that show consistent dividend growth and high dividend yields. Dividend yields are calculated by dividing the stock price per share into the dividend per share.

For example, XYZ Company sells for $20 per share and its annual dividend is $1.50 per share. Its dividend yield would be 7.5 percent ($1.50/$20 = 7.5 percent).

Some of the favorite targets for investment by income funds include utilities and real estate trusts (REITs). 

Most income funds contain a mixture of bonds and stocks.

A person looking for supplemental income in retirement years might be attracted to income funds. Since income funds produce taxable current income, investors need to be conscious of tax consequences.

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Value Funds

Value funds are the bargain shoppers of the market. They look for stocks that are trading below the value of the company's assets. There can be several reasons for this discrepancy.

The stock may be in an industry group that has fallen out of favor with investors. Many times this happens by default. Investors get excited about an industry group and other investments are forgotten.

Value funds seek out this type of stock and look for situations that have the potential and probability for turning around. The fund manager believes this forgotten child will return to favor with investors and experience catch-up growth.

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Cyclical and Sector Funds

Cyclical funds invest in stocks that are riding a market boom for whatever reason. The stock may be in an industry that has suddenly caught on fire with investors and the fund hopes to capitalize on a volatile market.

Sector funds focus on one particular segment of business, such as technology, healthcare, and so on.

*SOURCE: ALPHA TEACH YOURSELF INVESTING IN 24 HOURS, 2000, KEN LITTLE, PGS. 144-145*


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