3. Mutual fund objectives

When choosing a mutual fund, one of the most important things to consider is your investment objective. Mutual funds are classified into the following three categories: income, growth, and growth and income. The following exercises feature examples of three investors, each with one of the stated goals. Complete the paragraphs to illustrate your understanding of each mutual fund category.

Income Objective

Victor is nearing retirement and is looking to purchase a mutual fund that will provide a relatively safe investment as well as regular income payments. Among mutual funds with an income objective, Victor can either buy shares in money market funds, which invest in CDs, government securities, and short-term obligations issued by corporations, or he can invest in bond funds , for a slightly higher current income return and the potential for capital appreciation as well.

Within the category of bond funds are even more specific options. Victor decides to buy shares in a fund that invests in Treasury issues maturing in five to ten years, known as long-term government bonds. He is also collecting income from shares he already owns in a municipal bond fund, a type of fund that invests in high-yield, high-risk corporate bonds.

Growth Objective

Megan is a 32-year-old woman with two children who owns her own home and has a substantial retirement account. She recently received an inheritance from her uncle and is looking to invest in a mutual fund aimed at capital appreciation, and thus invests in well-established companies with higher-than-average revenues. She decides to purchase growth fund shares.

Growth and Income Objective

Eduardo is a 25-year-old engineer who plans to invest $500 from each monthly paycheck in a mutual fund. He is interested in a fund composed of high-yield, high-grade common stocks, along with some convertible securities and preferred stocks, so he buys $2,000 worth of (growth fund, value fund, or equity-income fund) shares. He would also like to put some money into a fund that invests solely in foreign securities; therefore, he purchases (global fund, geographic region fund, or international fund) shares as well.

One feature common to all of the above mutual funds is the automatic investment plan. Based on the characteristics of the investors above, this feature would be of most interest to (Victor, Megan or Eduardo)

Fill in the blanks with the correct bolded option