Table of Contents
Chapter 1: Introduction to Mutual Funds
Chapter 2: Categories of Mutual Funds
Chapter 3: Understanding Mutual Fund Terminology
Chapter 4: Mutual Fund Costs
Chapter 5: Buying Mutual Funds
Chapter 6: Tracking and Selling Mutual Funds
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Chapter 2: Categories of Mutual Funds
– Classification Based on Type of Investment
– Equity Funds
– Bond Funds
– Balanced Funds
– Money Market Funds
– Classification Based on Investment Goals
– Value Funds
– Growth Funds
– Classification Based on Fund Structure
– Closed End Funds
– Open End Funds
Chapter 2:Categories of Mutual Funds
Mutual funds have a really wide range of options to offer to investors. In fact you will find many more options with mutual funds than with stocks. As different funds come with different investment strategies and different portfolio allocations, and are managed by different fund managers, finding one that matches your investment plans is not too difficult.
But it is important to have a good idea of the various types available before you can make an accurate judgment about a fund that is right for you.
Classification Based on Type of Investment
- Equity Funds
- These are mutual funds where the investments are made in stocks. The risks are greatly reduced because the fund is invested in many different stocks. The main objective of the mutual fund manager of an equity fund is to create capital appreciation over the term of the investment. Income is a secondary objective. These objectives are very similar to what investors in individual stocks would have.There are different kinds of equity funds.
A fund which invests in fast growing and successful companies is described as a growth fund. This fund aims at maximum capital growth. Some funds base their investments on one sector or industry that appears promising. These are called sector funds or specialty funds. A study of the fund’s outlined strategy can tell you what kind of fund it is.
- Bond Funds
- Corporate and government securities or municipal bonds form the core portfolio of these funds. The objective of these funds is to provide a consistent and assured income to investors and to minimize risk. You can also opt for tax free bond funds, in which the investments are made in municipal bonds. The interest paid on these bonds is usually free from state and federal tax.
- Balanced Funds
- These funds have an investment strategy which aims at striking a balance between debt and equity investments. The high risk and returns of the equity component are evened out by the stability of the bond component. There may be other kinds of investments too but the basic investment strategy remains the same.
- Money Market Funds
- The investment strategy followed by money market funds is to opt for highly liquid securities like commercial paper, CD, short term Treasury bills etc, which are all very safe instruments and have a very short lock-in period.
Classification Based on Investment Goals
Mutual funds can also be classified according to the outcomes which are set by the fund managers. The investing strategy followed by different fund managers is different and these have a significant influence on the success of a fund.
- Value Funds
- This strategy involves studying and identifying companies which seem to be underpriced. The value investment fund manager parks funds in such ‘dark horses’, hoping to reap the rewards when these companies eventually realize their potential. The initial investment is low but the rewards can be really attractive if the analysis and the judgment of the manager is accurate.
- Growth Funds
- rowth investing involves backing companies which are all set for rapid growth in the near future. The fund manager hopes that these companies will continue to expand their business and generate better returns in the future. Over the long term, these funds expect to appreciate greatly in capital value, though they also take a higher risk.
Classification Based on Fund Structure
- Closed End Funds
- These are more like stocks in that a limited number of shares are issued when the fund is launched and investors can trade only in these. Once the initial launch period is over the shares in a closed ended fund can be bought and sold only in the secondary market through transactions with another investor. Supply and demand forces influence the price or NAV of this fund heavily.
- Open End Funds
- The open-end fund is the ‘true’ mutual fund. An investor can join up anytime and the fund manager invests the new funds with the same strategy he has been following until then. The investor is free to redeem his shares and convert them to cash at any point without looking for an investor who wants to buy. Shares in the fund are always available for purchase to new investors.
Fund managers can choose to adopt a conservative, moderate or aggressive investment approach with any of these mutual fund types. In addition to these basic categories, you can also buy index funds, which follow a market index like the S&P 500. These funds are not dependent on the expertise of the fund manager because they simply track the index. This means that these funds come at lower fund management costs.
Each kind of mutual fund is structured to match a specific risk appetite, return expectation and investment objective. The individual investments which make up the fund are all made with these factors in mind so that a consistent performance is achieved. When choosing a mutual find, you need to look at the advertised returns and risk as well as understand the kind of investing that will be carried out.
No matter what kind of fund you choose to invest in, you need to carry out a thorough study of who the fund managers are. Their expertise has a huge bearing on the performance of the fund, unless it is an index fund. A look at the past performance of the fund should give you a good idea of whether it will meet your expectations.
Next Chapter: Understanding Mutual Fund Terminology
