There are over 4,300 different mutual funds in existence today. The Investment Company Institute, a national association of mutual funds and other investment companies, classifies these funds into 21 major categories according to their investment objectives. We have listed below a brief description of each category. ==================== Aggressive Growth Funds: Seek maximum capital gains as their investment objective. Current income is not a significant factor. Some may invest in stocks of businesses that are somewhat out of the mainstream, such as fledgling companies, new industries, companies fallen on hard times, or industries temporarily out of favor. Some may also use specialized investment techniques such as option writing or short-term trading. Balanced Funds: Generally have a three-part investment objective: 1) to conserve the investors' initial principal, 2) to pay current income, and 3) to promote long-term growth of both principal and income. Balanced funds have a portfolio mix of bonds, preferred stocks, and common stocks. Corporate Bond Funds: Like income funds, seek a high level of income. They do so by buying bonds of corporations for the majority of the fund's portfolio. The rest of the portfolio may be in U.S. Treasury bonds or bonds issued by a federal agency. Flexible Portfolio Funds: May be 100% invested in stocks OR bonds OR money market instruments, depending on market conditions. These funds give the money managers the greatest flexibility in anticipating or responding to economic changes. GNMA or Ginnie Mae Funds: Invest in mortgage securities backed by the Government National Mortgage Association (GNMA). To qualify for this category, the majority of the portfolio must always be invested in mortgage-backed securities. Global Bond Funds: Invest in the debt securities of companies and countries worldwide, including the U.S. Global Equity Funds: Invest in securities traded worldwide, including the U.S. Compared to direct investments, global funds offer investors an easier avenue to investing abroad. The funds' professional money managers handle the trading and recordkeeping details and deal with differences in currencies, languages, time zones, laws and regulations, and business customs and practices. In addition to another layer of diversification, global funds add another layer of risk - exchange-rate risk. Growth Funds: Invest in the common stock of well-established companies. Their primary aim is to produce an increase in the value of their investments (capital gains) rather than a flow of dividends. Investors who buy a growth fund are more interested in seeing the fund's share price rise than in receiving income from dividends. Growth and Income Funds: Invest mainly in the common stock of companies that have had increasing share value but also a solid record of paying dividends. This type of fund attempts to combine long-term capital growth with a steady stream of income. High-yield Bond Funds: Maintain at least two-thirds of their portfolios in lower-rated corporate bonds (Baa or lower by Moody's rating service and BBB or lower by Standard & Poor's rating service). In return for a generally higher yield, investors must bear a greater degree of risk than for higher-rated bonds. Income-Bond Funds: Seek a high level of current income for their shareholders by investing at all times in a mix of corporate and government bonds. Income-Equity Funds: Seek a high level of current income for their shareholders by investing primarily in equity securities of companies with good dividend-paying records. Income-Mixed Funds: Seek a high level of current income for their shareholders by investing in income-producing securities, including both equities and debt instruments. International Funds: Invest in equity securities of companies located outside the U.S. Two thirds of their portfolios must be so invested at all times to be categorized here. Long-term Municipal Bond Funds: Invest in bonds issued by states and municipalities to finance schools, highways, hospitals, airports, bridges, water and sewer works, and other public projects. In most cases, income earned on these securities is not taxed by the federal government, but may be taxed under state and local laws. For some taxpayers, portions of income earned on these securities may be subject to the federal alternative minimum tax. Precious Metals/Gold Funds: Maintain two thirds of their portfolios invested in securities associated with gold, silver, and other precious metals. State Municipal Bond Funds - Long-term: Work just like other long-term municipal bond funds except their portfolios contain the issues of only one state. A resident of that state has the advantage of receiving income free of both federal and state tax. For some taxpayers, portions of income from these securities may be subject to the federal alternative minimum tax. State Tax-exempt Money Market Funds: Work just like other tax-exempt money market funds except their portfolios contain the issues of only one state. A resident of that state has the advantage of receiving income free of both federal and state tax. For some taxpayers, portions of income from these securities may be subject to the federal alternative minimum tax. Taxable Money Market Funds: Seek to maintain a stable net asset value by investing in the short-term, high-grade securities sold in the money market, such as treasury bills, bank certificates of deposit, and commercial paper (the short-term IOUs of large U.S. corporations). Money market funds limit the average maturity of their portfolio to 90 days or less. Tax-exempt Money Market Funds - National: Invest in municipal securities with relatively short maturities. Investors who use these funds seek investments with minimum risks. For some taxpayers, portions of income from certain of these securities may be subject to the federal alternative minimum tax. U.S. Government Income Funds: Invest in a variety of government securities. These include U.S. Treasury bonds, federally guaranteed mortgage-backed securites, and other government notes. *** End of Chapter ***