Choosing a Fund
Regardless of whether you are supplementing your retirement
income with the Savings
for Retirement Plan or the Faculty
and Staff Retirement Plan, you have more than 300 funds from which to
choose. All choices offered by Duke's five vendors may be classified into
one of the five categories listed below. These categories describe
investment objectives and are listed from the most
conservative (carrying the least amount of risk) to the least conservative
(carrying the most amount of risk). Risk refers to the likelihood of
fluctuating value as a result of market conditions commonly known as
"market risk." It is important to consider a fund's risk in
relation to its potential return.
MONEY MARKET FUNDS
Money market funds invest primarily in short-term debt instruments, such as government
securities or certificates of deposit (CDs). Because the effect of
inflation is minimal, these investments carry very little risk for the
investor. The value of the securities is generally near or equal to the
value of the money invested, plus interest that is automatically
reinvested. The interest rates fluctuate on a daily basis.
Types of Money Market Funds
- Certificate of Deposit (CDs)—a short-term debt instrument that
reaches maturity between a few weeks and a few years.
- U.S. Treasury Bill—a government-backed security that reaches maturity between a few months to a year.
- Corporate IOU ("commercial paper")—a
corporate-issued security reaching maturity between a few days and a
year.
- Bankers' Acceptance—a financial draft
drawn on banks that is often resold as a short-term investment.
INCOME FUNDS
These funds invest primarily in fixed income obligations, such as bonds,
which are formal certificates of debt, usually issued by corporations or
the government. Because such securities represent money lent for a
relatively long period of time at a specific rate of interest, the effect
of inflation is greater than on short-term investments such as
certificates of deposit. The income fund manager purchases securities that
will provide the highest returns in dividends and interest, and which are
also consistent with the safety of the investor. Money earned is
automatically reinvested.
Types of Bonds
- Bearer bond—a security whose holder,
or "bearer," is also the owner.
- Municipal bond—a security issued by
state or local government for which interest accrued is
tax-deferred.
- Savings bond—a bearer bond issued by
the U. S. Treasury.
- U.S. Treasury bond—a
government-backed security that pays interest every six months, and
whose maturity ranges from a few months to 30 years.
ASSET ALLOCATION FUNDS
Also known as balanced funds, these funds capture part of the market, including
stocks (U.S. and international), bonds, money markets, real estate, and
other mutual funds. The aim of these funds is to provide "diversified portfolios" for
investors, without individual
investors having to decide how to divide their investments among all the
available options. These portfolios seek to maximize return within
pre-defined risk parameters through capital appreciation and the
reinvestment of interest and dividend income. At the same time, they seek
to minimize fluctuations in the overall account value through a
diversified investment strategy.
Types of Asset Allocation Funds
There are several different types of asset allocation funds. The primary
differences can range from:
- what category of funds it will invest in. For instance, an asset allocation
fund may invest in: stocks and bonds only, stocks and mutual funds only,
or international funds, money market funds, and bonds only.
- what types of investments the funds will focus upon. For instance, an asset
allocation fund may invest in commercial funds, technological funds,
scientific funds, or any combination of similar types.
- what proportions of your investment will be allocated to each specific fund.
For instance, an asset allocation fund may invest in such proportions
as: 70% stocks/30% bonds, 50% mutual funds/50% bonds, or 20%
international funds/20% stocks/60% bonds. Some asset allocation funds
may even invest 100% of your money in the same category, merely
adjusting the strategy according to market fluctuations.
GROWTH AND INCOME FUNDS
These funds offer a combination of capital appreciation—that is, the increase
in value that results when a security's price increases—and current
income. Investments are primarily in stocks, which combine the potential
for capital growth with a record for paying out dividends. Bonds form part
of the growth and income to enhance current income. The aim is to increase
the value of the capital invested as well as to provide periodic dividend
income, which will be automatically reinvested to buy more shares in the
funds.
Types of Growth & Income Funds
There are many different types of growth and income funds. Primarily, the
differences between these funds stem from:
- what types of stocks and bonds are invested in; and
- what percentage of each is apportioned by the fund.
GROWTH FUNDS
These funds try to maximize capital appreciation. Investments are primarily in stocks—which
are shares of ownership, also known as equities—bought for the potential
increase in value, with less reliance on a return through dividends. They
offer potential for high return; however, have higher levels of risk
associated with them.
Types of Stock
- Blue chip stock—stock in well-regarded and financially strong companies.
- Growth stock—stock that pays no
dividends, but rather immediately reinvests earnings in order to
maintain growth.
- Income stock—stock that pays a consistent dividend.
- Value stock—stock whose price is low compared with potential earnings.
- Common stock—stock in a publicly held company
OTHER CLASSIFICATIONS
International Funds
When a particular fund is designated as "domestic," it refers to
securities that are predominantly issued by either domestic corporations
or the U. S. government. When a fund is "international," it
refers to securities that are predominantly issued by foreign corporations
and governments. Because these investments are concentrated in foreign
markets, they involve greater risks than do domestic investments. These
risks include political and economic uncertainties, as well as the risk of
fluctuations in the value of currencies. However, despite these additional
risks, these investments also involve the potential for a large return.
Global Funds
These funds are similar to international funds, with the exception that
they are concentrated in domestic and foreign markets.
Socially-Conscious Funds
These funds invest in a balanced portfolio that includes debt instruments and
stocks. Only companies that adhere to certain criteria, such as avoidance
of military contracts or progressive practices in the area of minority
concerns, are chosen.
Index Funds
These funds attempt to duplicate the performance of a particular market by
providing a portfolio of stocks and bonds that represent that
market.
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