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Income funds are structured to provide regular
income dividends to their investors. These funds invest in "income securities"
of corporations or governments (including preferred stock, bonds, and money
market investments). Such securities yield relatively stable current income.
They focus on paying dividends as their top priority while de-emphasizing the
growth in value of their portfolios. Preservation of capital is a concern.
Income funds are popular with investors who want stable income from their mutual
funds.
Index funds are popular among investors wishing to
keep their mutual funds' performance in line with "the market." These funds buy the securities that make up major market indexes. The advantage of
index funds is that they are always in line with their market index. Their
downside is that they cannot outperform the market. Some funds divide their
holdings evenly among the various stocks. Some use dollar weighting so that
bigger companies make up a larger share.
Balanced funds seek to balance growth and income in
one portfolio. To do this, they invest in common stock, preferred stock, bonds,
and cash equivalents. Hypothetically, these funds have a "balanced" ratio of
these asset types. Managers of balanced funds can, however, shift this ratio one
way or the other to take advantage of high interest rates or stock market
growth. Balanced funds generally have low volatility and are popular with
investors seeking current income with growth potential.
Growth and income funds are similar to balanced
funds. However, they rely mostly on growth stocks that pay dividends.
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