10 Different Types of Mutual Funds | Different Approaches to Investing. In the previous articles, we have given Debt Equity Ratio : Formula, Analysis, How to Calculate, Examples and FDI (Foreign Direct Investment) : Meaning, Types, and Advantages. Today we are discussing what are the different types of mutual funds and different approaches to investing. It’s important to understand that each mutual fund has different risk and reward profiles. In general, the higher the potential return, the higher the risk of potential loss. Although some funds are less risky than others, all funds have some level of risk – it’s never possible to diversify away all risk – even with so-called money market funds. This is a fact for all investments. Each mutual fund has a predetermined investment objective that tailors the fund’s assets, regions of investments and investment strategies.
At the most basic level, there are three flavors of mutual funds: those that invest in stocks (equity funds), those that invest in bonds (fixed-income funds), those that invest in both stocks and bonds (balanced funds), and those that seek the risk-free rate (money market funds). Most mutual funds are variations on the theme of these three asset classes.
Common types of Mutual Funds
1. Money market funds
These funds invest in short-term fixed-income securities such as Government Bonds, treasury bills, bankers’ acceptances, commercial paper and certificates of deposit. They are generally a safer investment, but with a lower potential return than other types of mutual funds. Canadian money market funds try to keep their Net asset value stable at $10 per security.
2. Bond Funds
These funds are professionally managed portfolios that invest in numerous individual bonds. Each fund has a stated objective, generally focusing on a particular sector, such as corporate or Treasury bonds, or broad categories, such as investment grade or high yield. Funds can also have different levels of interest rate sensitivity depending on whether they focus their investments on short, intermediate, or long-term bonds.
3. Income Funds
These funds are named for their purpose: to provide current income on a steady basis. These funds invest primarily in government and high-quality corporate debt, holding these bonds until maturity in order to provide interest streams. While fund holdings may appreciate in value, the primary objective of these funds is to provide a steady cash flow to investors. As such, the audience for these funds consists of conservative investors and retirees. Because they produce regular income, tax-conscious investors may want to avoid these funds.
4. Equity funds
These funds invest in stocks. These funds aim to grow faster than money market or fixed income funds, so there is usually a higher risk that you could lose money. You can choose from different types of equity funds including those that specialize in growth stocks (which don’t usually pay dividends), income funds (which hold stocks that pay large dividends), value stocks, large-cap stocks, mid-cap stocks, small-cap stocks, or combinations of these.
5. Balanced Funds
The objective of these funds is to provide a balanced mixture of safety, income, and capital appreciation. The strategy of balanced funds is to invest in a portfolio of both fixed income and equities. A typical balanced fund will have a weighting of 60% equity and 40% fixed income. The weighting might also be restricted to a specified maximum or minimum for each asset class so that if stock values increase much more than bonds, the portfolio manager will automatically rebalance the portfolio back to 60/40.
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6. Index Funds
Index funds are the only funds that are not actively managed. Instead, they purchase most or all of the securities contained in a specific index with the intention of delivering the same performance as that index. There are different types of index funds—domestic stock, international stock, and bond—each of which offers different levels of risk.
7. Specialty funds
These funds focus on specialized mandates such as real estate, commodities or socially responsible investing. For example, a socially responsible fund may invest in companies that support environmental stewardship, human rights and diversity, and may avoid companies involved in alcohol, tobacco, gambling, weapons and the military.
8. Global/International Funds
An International Fund (or foreign fund) invests only in assets located outside your home country. Global Funds, meanwhile, can invest anywhere around the world, including within your home country. It’s tough to classify these funds as either riskier or safer than domestic investments, but they have tended to be more volatile and have a unique country and political risks. On the flip side, they can, as part of a well-balanced portfolio, actually reduce risk by increasing diversification since the returns in foreign countries may be uncorrelated with returns at home. Although the world’s economies are becoming more interrelated, it is still likely that another economy somewhere is outperforming the economy of your home country.
9. Real estate funds
Real estate funds invest in companies that are tied to the commercial and residential real estate markets which could include mortgage companies, property managers, realtors, and builders. The companies held within the real estate funds are highly concentrated in a single industry so the funds tend to be riskier than other stock funds.
10. Market neutral funds
Market neutral funds can maintain long and short positions in search of consistent returns approximately 3% to 6% above three-month Treasury bill yields, regardless of what direction the overall market moves. The positions in these funds can be in many different types of securities, including domestic and international stocks, ETFs, bonds, currencies, and commodities.
Different Approaches to Investing
4 common approaches to investing
- Top-down approach – looks at the big economic picture, and then finds industries or countries that look like they are going to do well. Then invest in specific companies within the chosen industry or country.
- Bottom-up approach – focuses on selecting specific companies that are doing well, no matter what the prospects are for their industry or the economy.
- A combination of top-down and bottom-up approaches – A portfolio manager managing a global portfolio can decide which countries to favor based on a top-down analysis but build the portfolio of stocks within each country based on a bottom-up analysis.
- Technical analysis – attempts to forecast the direction of investment prices by studying past market data.
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