According to the Securities & Exchange Commission (SEC), most mutual funds can be classified into one of three categories: stock funds (also called equity funds), bond funds (also known as fixed income funds), and money market funds. Funds are either actively managed (a portfolio manager or management team actively manages the investments of the fund to outperform industry benchmarks) or passively managed (a fund whose investment securities are not managed by a portfolio manager, but are automatically selected to match an index or part of the market). It’s important to note that fund managers don’t always invest 100 percent of the fund’s assets in the strategy that is featured on the fund’s name (e.g., LifePlan Growth Fund, Large Company Fund, etc.). This practice is known as style drift. The SEC has issued rules that require 80 percent of fund assets to be invested in the area that is suggested by its fund name, but fund managers have up to 20 percent to “play with.” For example, a fund manager might allocate 20 percent of his or her large company fund into fast-growing small company stocks to compensate for lagging returns in the 80 percent of the fund that focuses on large company stocks.
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