Different rules govern the investment in and ownership of collective funds, the issuing and transfer of the fund's shares, use of leverage, and permissible fund investment strategies and practices.  The different types of investment funds have been codified by securities and tax laws.

The investment policy of a fund is the prescribed practices and procedures for an investment company's portfolio managers.  Among other things, it restricts or prohibits investments in various types of assets and use of investment strategies that entail risks beyond those disclosed in the prospectus.  It also covers the fund's investment style, asset concentration and performance standards.

Active Stock Portfolio Management Styles
This illustrates different styles of active portfolio management, where active management can focus on stock picking, sectors or asset classes based on macroeconomic bets or indexes, which demonstrates the lowest deviation from the manager's benchmark portfolio (active share) and the lowest tracking errors relative to the benchmark.

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This illustrates different styles of active portfolio management, where active management can focus on stock picking, sectors or asset classes based on macroeconomic bets or indexes, which demonstrates the lowest deviation from the manager's benchmark portfolio (active share) and the lowest tracking errors relative to the benchmark.

The prospectus of a mutual fund or ETF will describe its investment policies, strategy and objective, its key investment risks, disclose whether and how it may use derivatives, net asset value for the beginning and end of each period, total returns, and various performance ratios.  SEC rules also require US mutual funds and ETFs to disclose after-tax returns in their prospectuses.  It may also identify its asset type – stock, bond, money market, mixed, etc. – and classes – A, B, C, etc.

An investment strategy requires development of fund objectives, analysis of choices and opportunities, and the approach to achieve the objectives.  This in turn will determine the fund's asset type, whether its diversified or non-diversified, and its management style.

The investment objective of an investment company describes the goal the fund is to achieve by following the practices prescribed in its investment policy and strategy.  The objectives range from income to capital gains with minimal consideration for current income.  They also commonly specify a desired level of risk and whether the fund seeks taxable or tax-free income.

The investment objectives of funds are generally a combination of income and capital gains with the preservation of the investment.  Similarly, risk tolerance ranges from aggressive funds that have relatively risky investment policies and volatile returns to conservative funds having investment policies designed to moderate risk and achieve relatively stable returns.

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