Saturday, September 20, 2008
Classification of Mutual Funds
| There are a myriad of different mutual funds. The Investment Company Institute (ICI) is an association for mutual funds that classifies the many types of funds. Essentially, there are three basic types of mutual funds: equity funds, fixed-income funds and money-market funds. If you are not completely sure what classification a mutual fund belongs to, check its beta co-efficient. The funds with the higher betas will probably be aggressive growth funds (equity or stock funds), and those with lower betas will be fixed-income funds. Aggressive Growth Funds Aggressive growth funds are stock funds that have primarily one objective--maximum capital gains. Capital gains are just the increase in the value of an investment. These types of mutual funds invest in many different securities, including new industry stocks, small-company stocks, and practice investment techniques such as selling stocks short, futures, and options. Aggressive growth funds tend to be the most volatile of funds, as well. Examples of aggressive growth funds are Fidelity Magellan, Tudor, 20th Century, etc. Growth Funds Growth funds are those that invest in the stocks of well-established, blue chip companies. Dividends, and consequently steady income, are not the primary goal of these types of funds. Instead, they focus on increasing capital gains. Examples of growth fund are Fidelity Destiny I, Ivy, Janus, T. Rowe Price New Era, 20th Century Growth, Manhattan and many more. Growth and Income Funds Growth and income funds incorporate both increased capital gains and producing steady income. They are less volatile than aggressive growth funds. Examples of these funds are Evergreen Total, Investment Company of America, 20th Century Select, Vanguard Index Trust, Windsor II, etc. Equity (Stock or Income) Funds Equity funds allow investors to own a piece of the company that they have invested in, like common stocks. Stocks have historically been the best investment bar none. They have outperformed all other investment vehicles in the long term, but there is added risk. See the section on stocks and bonds for more information about this. Equity funds seek to produce a high level of current income by investing primarily in equity securities of companies with solid reputations and a record of good-paying dividends. Decatur and Fidelity Puritan are examples of equity funds. Balanced Funds Balanced funds have a portfolio mix of bonds, preferred stocks and common stocks. Balanced funds generally aim to conserve investors' initial investment, to pay an income and to aid in the long-term growth of both the principle and the income. Examples include Phoenix balanced, Wellington, Loomis-Sayles Mutual, etc. Bond Funds These type of mutual funds invest in a mixture of corporate and government bonds at all times. The most sophisticated investors often switch between short-term, intermediate-term and long-term bonds, depending upon the direction of interest rates. Short-term bonds are those with maturity of less than three years; intermediate bonds are those that have bonds of three to ten years, and long- term bonds are over ten years. For a more comprehensive description of bonds, refer to that section. Global Funds Global funds are those that invest in equity securities of companies around the world and in the United States. These funds can change the percentage of their allocation in foreign and domestic markets, as well. For example, if there are major problems in foreign markets, global funds will allow the mutual fund company to pull out money invested there. International funds International funds invest in equity securities of companies located outside of the United States. Two-thirds of their portfolios must be invested in these companies at any one time. Many of these international funds invest in the emerging markets of nations around the world. They do not offer the flexibility of the global funds because of the two-thirds minimum requirement. Fixed-Income Funds Fixed-income funds are safer than equity funds, but as always, do not yield as high returns as the latter do. These types of funds are geared towards the investor who is approaching old age and doesn't have many earning years left. Many investors hope to draw a steady income from these types of mutual funds. Bond funds fall into the category of fixed-income funds. Fixed-income funds entail lending out money to buy Certificate of Deposits (CDs) or bonds, and as a result, your principle isn't expected to take a great hit in the event of the market heading south, but at the same time, your principle won't appreciate greatly when the loan comes due either. Money-Market Funds Money market funds are generally the safest and most secure of mutual fund investments. They invest in the largest, most stable securities, including Treasury bills. Money-market funds have beta co-efficient values of zero because the chances of your principle being eroded are very minimal. How do these funds work? Money-market funds are like fancy checking accounts and the best part is that they are risk-free. If you invest a thousand dollars, you will get that money back. It is simply a matter of when you get it back. A thousand dollars will get you a thousand shares. Usually the prices of shares in money-market funds are kept at around $1. As an investor, you will be given checks which you can use against your deposit. The minimum amount for these checks, however, is usually around $250 or $500. When investing in a money-market fund, you should pay attention to the interest rate that is being offered, along with the rules regarding check-writing. Money-markets have allowed investors to reap high yields on their deposits, and have made the entire investment process more accessible to people. The interest rates on money-market funds are changing nearly day to day. In times of inflation, these funds have had high yields--like 18% in the early 1980s. The interest rate is very important information. Many investors believe that even 1% is not worth the trouble of shopping around. The graph below shows the difference 1% makes on $5000 invested for different duration. The Importance of 1% Yield 1 Year 3 Years 5 Years 10 Years 15 Years 5.25% $5,268 $5,847 $6.490 $8,423 $10,933 6.25% $5,320 $6,022 $6,818 $9,296 $12,676 7.25% $5,372 6,203 7,161 10,257 14,690 Real Estate Funds Real estate has often rivaled common stocks as amongst the most profitable of investments. A drawback to investing in real estate is that it is not very liquid. In other words, an investor cannot pick and sell and turn around and buy as quickly as with other investments. Mutual funds provide some of this liquidity. Real Estate Investment Trusts (REITs) are sold like stocks on an exchange. They are not exactly mutual funds. REITs provide the most liquidity, along with the lucrative benefits of investing in real estate. T. Rowe Price, Vanguard and others have many REITs that you can invest in. Index Funds Indices (pl. index), as you know now, provide a snapshot of how the market is doing on the whole. The most famous indices are the Dow Jones Industrial Average (about 30 blue-chip stocks) and Standard & Poor's 500 Index. Both of these give a view of how the market is doing in general, but for more a specific view, the Wilshire 5000 and the Value Line Composite provide more accurate information. Index funds try to emulate a market index, most often the S&P 500. Because of expenses, these index funds perform a bit worse than the index itself. An example of a good index fund: Vanguard's 500. Fund Families A family of funds are a group of funds under one organization. When you invest in a fund of families, you can switch between different types of funds with ease. Some of the best fund families available are Strong, T. Rowe Price, Dreyfus, Fidelity, Vanguard, etc. The largest family is Fidelity, with over 100 different available funds. See the table of some popular funds at the end of this section. |
posted by hearthy at 8:11 PM
