hold fixed-income or other types of securities. Funds com- monly will hold between 4% and 5% of total assets in money market securities to provide liquidity necessary to meet potential redemption of shares. It is traditional to classify stock funds according to their emphasis on capital apprecia- tion versus current income. Thus, income funds tend to hold shares of firms with high div- idend yields, which provide high current income. Growth funds are willing to forgo current income, focusing instead on prospects for capital gains. While the classification of these funds is couched in terms of income versus capital gains, it is worth noting that in practice the more relevant distinction concerns the level of risk these funds assume. Growth stocks and therefore growth funds are typically riskier and respond far more dramatically to changes in economic conditions than do income funds.   Fixed-Income Funds As the name suggests, these funds specialize in the fixed-in- come sector. Within that sector, however, there is considerable room for specialization. For example, various funds will concentrate on corporate bonds, Treasury bonds, mortgage- backed securities, or municipal (tax-free) bonds. Indeed, some of the municipal bond funds will invest only in bonds of a particular state (or even city!) in order to satisfy the invest- ment desires of residents of that state who wish to avoid local as well as federal taxes on the interest paid on the bonds. Many funds will also specialize by the maturity of the secu- rities, ranging from short-term to intermediate to long-term, or by the credit risk of the is- suer, ranging from very safe to high-yield or "junk" bonds.   Balanced and Income Funds Some funds are designed to be candidates for an in- dividuals entire investment portfolio. Therefore, they hold both equities and fixed-income securities in relatively stable proportions. According to Wiesenberger, such funds are clas- sified as income or balanced funds. Income funds strive to maintain safety of principal con- sistent with "as liberal a current income from investments as possible," while balanced funds "minimize investment risks so far as this is possible without unduly sacrificing pos- sibilities for long-term growth and current income."   Asset Allocation Funds These funds are similar to balanced funds in that they hold both stocks and bonds. However, asset allocation funds may dramatically vary the propor- tions allocated to each market in accord with the portfolio managers forecast of the rela- tive performance of each sector. Hence these funds are engaged in market timing and are not designed to be low-risk investment vehicles.   Index Funds An index fund tries to match the performance of a broad market index. The fund buys shares in securities included in a particular index in proportion to each se- curitys representation in that index. For example, the Vanguard 500 Index Fund is a mu- tual fund that replicates the composition of the Standard & Poors 500 stock price index. Because the S&P 500 is a value-weighted index, the fund buys shares in each S&P 500 company in proportion to the market value of that companys outstanding equity. Invest- ment in an index fund is a low-cost way for small investors to pursue a passive investment strategy-that is, to invest without engaging in security analysis. Of course, index funds can be tied to nonequity indexes as well. For example, Vanguard offers a bond index fund and a real estate index fund.