Growth and Value Funds

EVERY MANAGER is different, but there are three broad archetypes when it comes to investment strategy: growth, value and blend. The issue here is whether the manager (a) is willing to chase popular (a.k.a. expensive) stocks, hoping to cash in on their momentum; or (b) is seeking to "discover" cheap stocks, betting that the market will discover them, too.

Growth Funds

As their name implies, these funds tend to look for the fastest-growing companies on the market. Growth managers are willing to take more risk and pay a premium for their stocks in an effort to build a portfolio of companies with above-average earnings momentum or price appreciation.

Growth funds are the most volatile of the three investment styles. It's also why expenses and turnover (which leads to tax liability) are also higher. For these reasons, only aggressive investors ( high-risk takers), or those with enough time to make up for short-term market losses, should buy these spooky funds.

Value Funds

These funds like to invest in companies that the market has overlooked. Managers search for stocks that have become "undervalued" -- or priced low relative to their earnings potential.

Sometimes a stock has run into a short-term problem that will eventually be fixed and forgotten. Or maybe the company is too small or obscure to attract much notice. In any event, the manager makes a judgment that there's more potential there than the market has recognized. His bet is that the price will rise as others come around to the same conclusion.

The big risk with value funds is that the "undiscovered gems" they try to spot sometimes remain undiscovered. That can depress results for extended periods of time. Volatility, however, is quite low, and if you choose a good fund, the risk of doggy returns should be minimal. Also, because these fund managers tend to buy stocks and hold them until they turn around, expenses and turnover are low. Add it up, and value funds are most suitable for more conservative, tax-averse investors.

Blend Funds

These can go across the board. They might, for instance, invest in both high-growth stocks and cheaply priced companies. As such, they are difficult to classify in terms of risk. In order to determine if a particular blend fund is right for your needs, you'll probably have to look at the fund's holdings and make a call.

Generally, diversification is a trend in selection.