(MONEY Magazine) – Caesar divided all Gaul into just three parts, and Shakespeare summed up a man's life in only seven ages. So how come MONEY needs 11 separate categories to define fixed-income funds? After all, as long as you're making money, who cares whether you own a high-yield corporate or a short-term tax-exempt? Well, you should. Even more so than our stock fund groupings (explained in July's Fund Watch), a bond fund's category will help you to predict how its funds will behave in a given market. This is possible because how bond funds perform compared with one another depends overwhelmingly on just two factors: the average maturity of the bonds in their portfolios and their credit quality. The longer a bond's maturity, the higher its yield usually is and the more sensitive its share price is to fluctuations in interest rates. (Bond prices, and hence bond fund share prices, move inversely to interest-rate changes.) For example, the typical fund in our U.S. Government bonds category recently had an average maturity of 15.9 years and yielded 6.3%, while short/intermediate-term taxables (six years) paid only 5.9%. If rates rise by just one percentage point, however, the government fund's share price would drop roughly 9% -- nearly twice as much as the short/intermediate's. Conversely, if rates dip a point, the longer-term fund would appreciate twice as much. Credit quality also produces a trade-off between yield and risk. The higher the quality of the bonds owned by the fund, the lower the yield but the smaller the risk of price-crunching default. (The top four grades are AAA, AA, A and BBB in Standard & Poor's rating system.) U.S. Government bond funds, the bulk of whose holdings are backed by Uncle Sam, are considered to be the highest quality. By contrast, high-yield corporate bond funds, which are packed with issues from financially shaky companies, have very high credit risk. They perform well when a strong economy brightens corporate prospects; when recession threatens, however, they can be stinkers (as they were in 1990, when they lost 9.7% on average). Some fund categories have unique risks. The share prices of world income funds will fluctuate inversely with the value of the dollar as well as with interest rates abroad. Mortgage-backed securities funds face prepayment risk -- the chance that homeowners will pay off their loans early, thus forcing your fund to reinvest at lower rates. And flexible income and convertible funds will suffer whenever the equity markets take a dive. Fine as our categories may slice up the bond universe, different portfolios in the same group are not always interchangeable. Even within the staid short/ intermediate category, for instance, a fund with an average maturity of 10 years is 3.5 times more volatile than one with a two-year maturity. And there's a huge gap in credit quality between a high-yield fund that keeps 90% of its holdings in the junkiest corporations and one that concentrates on the most secure of the low-grade bonds. In the end, understanding categories is only a useful first step in knowing how a fund will behave. To learn more, you'll need to delve into the fund's annual report and prospectus. Our advice: Drink black coffee before you begin.

CHART: NOT AVAILABLE CREDIT: Source: Lipper Analytical Services CAPTION: THE VITAL STATS ON OUR 11 BOND FUND CATEGORIES

CHART: NOT AVAILABLE CREDIT: Source: Lipper Analytical Services CAPTION: TOP DIVERSIFIED EQUITY FUNDS GENERATE SOME HEAT IN JULY Powered by a resurgence in growth stocks, almost half our top diversified stock funds managed to outdistance the S&P 500's 4% gain in July. The month's winner, USF&G Axe-Houghton Growth, scooted 8.6% on the strength of holdings in stocks like Clayton Homes, up more than 14% for the month. In September, the fund will merge with another of our July winners, T. Rowe Price New America, up 6.4%.

CHART: NOT AVAILABLE CREDIT: Source: Lipper Analytical Services CAPTION: GROWTH AND SECTOR FUNDS TOP OUR ROSTER OF SELECTED CATEGORIES Growth funds sizzled for the first time this year, rising 3.7% for the month, partly on the strength of surprisingly strong jumps in corporate earnings. Sector funds, led by financial services portfolios, matched the growth funds' return, however. And for the past 12 months, it was financial services fund Fidelity Savings & Loan that bested all other equity entries with a 52.3% gain.

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: BOND FUNDS BOUNCE TO THE ECONOMY'S SUMMERTIME BLUES Weak employment data and a shaky housing market may depress economists, but they were cause for celebration in our bond categories. Reading the sour economic news as proof that inflation was dormant, investors piled into bonds, driving down rates on long bonds by 0.35 points. The longest of the highly rate-sensitive Benham zero-coupon funds, Target 2020, posted the month's biggest gain, jumping over 8%.