Stock funds, sometimes known as equity funds, invest in a variety of ways. If you have a choice, it’s generally better to choose two or three funds buying different types of stock than to concentrate on funds investing in the same way.
One key difference is between growth funds and value funds. In brief, growth fund managers look for stocks whose prices they expect to go up as the companies’ products or services reach wider markets and their earnings increase. Value fund managers look for stocks that are seen as undervalued, or low-priced, because the company or sector is currently out of favor with investors. Value funds often outperform growth funds when the economy isn't strong. But there’s still a risk with value funds because not all companies recover from setbacks or recapture investors' interest.
Another important distinction is size, or market capitalization. Large capitalization, or large-cap, companies tend to be more price stable and less vulnerable to major losses than small-cap companies. That’s true in part because they have larger financial reserves. On the other hand, small- and mid-cap companies may have more growth potential.
You may find that the funds in your plan combine these designations, so you may have a choice between a small-cap growth fund and small-cap value fund, or between a large-cap growth fund and mid-cap value fund.
Your plan may also offer sector funds, which invest in one segment of the economy, such as healthcare or utilities, or a contrarian fund, which invests in stocks other investors are shunning. Some plans also offer international stock funds, which invest in companies based in other countries.
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