Mutual funds aim at particular targets and try to hit them by making certain types of investments.

Every mutual fund — stock, bond, or money market — is established with a specific investment objective that fits into one of three basic goals:

But within those categories, there’s enormous variety that results from the way an individual fund invests.

For example, funds that fit into the growth category can be subdivided by geographic area, by their timetable for the growth they seek, and by the level of risk they take to achieve their objective. Any fund that describes itself as seeking aggressive growth generally is taking more than average risk.

Targeted investment risks

One risk you face as a mutual fund investor is the probability that a number of funds with different objectives may invest in the same companies, creating what’s known as portfolio overlap. This risk isn’t included in the risk assessment that funds must provide about themselves, such as risk to principal, interest rate risk, and currency risk. But it’s an important one.

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Overlap may occur because all actively managed mutual funds try to provide the best possible results and may deliberately buy investments outside their normal focus to improve their bottom line. If several of the funds you own all bulk up on the same star performer, you may have a much less diversified mutual fund portfolio than you intend — or even realize.

These charts group funds into three categories by investment objective. They also illustrate the correlation between a fund’s objective and the risks it may face.

income funds

Hedging against risk

International fund managers may hedge their portfolios to protect the return on their funds. Hedging, in this context, means anticipating and offsetting possible future changes in the relative values of different currencies, specifically the dollar in relation to the currencies of countries where the fund invests.

The most common tactic is to buy futures contracts that guarantee fixed exchange rates at specific points in the future. Funds that hedge may put up to 50% of their total assets in currency contracts rather than stocks or bonds. But other funds don’t hedge at all, figuring that exposure to other currencies is part of the reason for investing overseas.

Understanding Mutual Funds Targeted Investments by Inna Rosputnia

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