Fund Fashion: Know the Styles
Going into a mutual-fund office can feel like entering a candy store: The walls are crammed with inviting offers.
One tip to cut through the clutter: Be aware of the main fund-investing styles: Some key themes are "growth" versus "value" and "index" versus "managed."
Growth or value?
Growth and value are two contrasting approaches to picking stocks.
Some fund managers go where the growth is. They buy companies with the potential for rapid growth in profits (also called earnings) and sales.
A value manager looks for companies whose stock prices are low compared with other companies in the same industry. The point of comparison can be profits, or some other measure of financial performance. Value investors are bargain-hunters, seeking stocks that are out of favor with other investors.
A growth manager, by contrast, might buy a stock that is well known but has momentum. Growth company General Electric, for example, is both popular and profitable. As long as it keeps earning money, it's stock price will likely grow over the long term.
In practice, many managers mix both styles, growth and value. But straight value funds often hold up better in a downturn.
Index or managed?
Managed funds rely on a manager to make the picks and beat the market, where an index fund relies on computers to track an index and match the market.
Some years, managed funds beat index funds. Others, such as 1995 and 1996, the indexers win.
Be careful in a down market, says Larry Armel of Jones & Babson, a fund company in Kansas City, Mo. An index fund will follow the market downward, while an actively managed fund may be able to cushion the fall.