A key distinction among them is that some stress growth, some income, and some a combination of the two. Some funds involve more risk to capital than others because they buy stock in emerging companies. The profits on all stock fund distributions are taxable, but no tax is due on the increased value of a fund until you sell it. Unlike bonds, however, these funds have no maturity date and no guaranteed repayment of the amount you invest. On the plus side, though, you can automatically reinvest your dividends to buy more shares.
Bond funds come in many varieties, with different investment goals and strategies.
There are investment grade corporate bond funds and riskier junk bonds often sold under the promising label of high-yield funds . The two main categories of bond funds are taxable and tax-free . There's no federal tax on municipal bond fund distributions, and no state or local taxes for investors who live in the municipality that issues the underlying bonds. New Yorkers, for example, can buy triple tax-free New York funds and keep all their earnings. Since these funds are essentially risk-free, some investors prefer them to stock or bond funds.