Investing and Investment Tips

The Major Types of Mutual Funds

Posted by on Aug 11, 2016 in Blog | 0 comments

mutual fund investments

Money Market Funds

 

This type of funds most usually invests in fixed income, short-term securities.  Examples would be government bonds, T-bills (Treasury bills), banker’s acceptance, CD (certificates of deposit) and commercial paper.  These are considered a safer form of investment, but also have a lower potential for return.

 

FACTOID:  Commercial paper is a short-term debt issued by a corporation.  This is usually done for purposes of funding accounts receivable or meeting short-term liabilities.  Maturity is not longer than 270 days.

Fixed Income Funds

 

As they name says, these are investments that pay a fixed rate of return over a specified period.  They can be compared to governments bonds, investment grade corporate bonds and high-yield bonds.  The point of these funds is to generate capital regularly, accomplished mainly through generated interest.  High-yield corporate bonds carry, in most instances, a higher degree of risk than comparable funds that hold only government or investment-grade bonds.

 

Equity Funds

 

Equity funds invest in the stock market, and while they can generate substantial returns, they are also subject to a high degree of risk.  It should be noted, there are different types of equity funds, some specializing in growth stocks (those types usually do not pay dividends), income funds (which as the name implies focus on stocks that pay dividends), value stocks, large-cap stocks, mid-cap stocks, small-cap stocks, or a variation of all of these funds, actually spreading the risk.

 

Balanced Funds

 

As the name implies, this type of funds seeks to hold a diversity of positions in equities and fixed income securities.  This is designed to balance the risk/reward ration allowing greater potential growth while limiting the downside.  While careful thought goes into the actually acquit ion, the initial selection is most often based on a formula or algorithm, which can help narrow the field.  This type of fund would carry more risk than fixed income, but less than a fund based on pure equity.  The actual split of acquisition will depend on whether the fund is aggressive or conservative.

 

Index Funds

 

An index fund will focus on the performance of a particular index, such as the S&P 500 Index.  The actual value of the mutual funds will rise or fall as this index fluxgates in the marketplace.  In most cases this type of fund will have lower costs to the investor since the management of same is less involved and requires less research.

 

Active Management compared to Passive Management

 

If the fund manager (or team) is actively involved, they are likely buying and selling investments in an attempt to stay ahead of (or outperform) the market or pre-determined benchmark.   Conversely, a passively managed fund would have a portfolio of securities that are themselves designed to track the performance of the index they are watching.  The actual holdings of the fund would be adjusted only if there is an adjustment within the components of the index itself.

 

Specialty Funds

 

These funds focus on specifics like commodities, real estate or companies that have a social cause behind them.  Examples could be green (environmentally conscious) companies or those focused on human rights and diversity among races or medical research.  They may also purposely steer award from investments that touch on alcohol and tobacco.  They may also avoid companies that participate in military endeavors or weapons.

Fund-of-Funds

 

While most funds invest in specifics stocks, indexes or causes (as outlined above) there are also funds that simply invest in other funds they believe will rise in value.  This type of fund could be compared to a balanced fund, making diversification a natural choice for an investor.

 

Before making an investment, it’s important you understand not only your own but the financial goals of the fund itself.  While doing this, it’s important you understand the risk involved, then compare that to your level of risk vs. reward.  It’s important to realize that while two funds may be of the same type, their risk, and potential return will likely not be the same.  The savvy investor will take the time to not only do their own due diligence but seek the advice of a financial advisor before making any major decisions.

Style of Investing

 

While not always readily apparent without research, the portfolio manager will often have different approaches or mindsets concerning how they invest the fund’s assets.  By spreading your money among different types of styles, which is another way to diversify your investments.

Four Approaches to Investing

 

Top Down

 

This investing attempts to look at the larger economic picture, then find industries they feel will do well in that environment.  They then make investments in those companies or (sometimes) companies within a country, they feel will thrive.

 

Bottom-Up

 

This investing focuses on companies that are performing well, no matter where they fit within the economy.

Combination of Approaches

 

When a portfolio manager handles a global position, they may seek a combination of if top-down and bottom-up approaches.  This allows them the greatest flexibility to build out their portfolio of stocks.

 

This article is designed as a gateway for further study into the fascinating, sometimes frustrating world of investing.

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