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Articles on Mutual Fund types |
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Open-end fund
The term Mutual fund is the common name for
an open-end investment company. Being open-ended means that at the
end of every day, the investment management company sponsoring the
fund issues new shares to investors and buys back shares from
investors wishing to leave the fund.
Mutual Funds may be legally structured as corporations or business
trusts but in either instance are classed as open-end investment
companies by the SEC.
Other funds have a limited number of shares; these are either
closed-end fund or unit investment trusts neither of which are
mutual funds.
Exchange-traded funds
A relatively new innovation, the exchange traded fund (ETF), is
often formulated as an open-end investment company. The way ETFs
work combines characteristics of both mutual funds and closed-end
funds. An ETF usually tracks a stock index (see Index funds).
Shares are only created or redeemed by institutional investors in
large blocks (typically 50,000 shares). Investors typically
purchase shares in small quantities through brokers at a small
premium or discount to the net asset value through which the
institutional investor makes their profit. Because the
institutional investors handle the majority of trades, ETFs are
more efficient than traditional mutual funds and therefore tend to
have lower expenses. ETFs are traded throughout the day on a stock
exchange, just like closed-end funds.
Equity funds
Equity funds, which mainly consist of stock
investments, are the most common
type of mutual fund. Equity funds hold 50 percent of total funds
invested in mutual funds in the United States. Oftentimes equity
funds focus investments on particular strategies and certain types
of companies.
Capitalization
Some mutual funds focus investments on companies of particular
size ranges, with size measured by their market capitalization.
The size ranges include micro-cap , small-cap, mid-cap, and
large-cap. Fund managers and other investment professionals have
varying definitions of these market cap ranges. The following
ranges are used by Russell Indexes include:
Russell Microcap Index ($54.8 - 539.5 million)
Russell 2000 - small cap ($182.6 million - 1.8 billion)
Russell Midcap Index ($1.8 - 13.7 billion)
Russell 1000 - large cap ($1.8 - 386.9 billion)
Growth vs. value
Another division is between growth funds, which invest in stocks
of companies that have the potential for large capital gains,
versus value funds, which concentrate on stocks that are
undervalued. Growth stocks typically have a potential for larger
return, however such investments also bear larger risks. Growth
funds tend not to pay regular dividends. Sector funds focus on
specific industry sectors, such as biotechnology or energy. Income
funds tend to be more conservative investments, with a focus on
stocks that pay dividends. A balanced fund may use a combination
of strategies, typically including some investment in bonds, to
stay more conservative when it comes to risk, yet aim for some
growth.
Index funds versus active management
An index fund maintains investments in companies that are part of
major stock indices, such as the S&P 500, while an
actively-managed fund attempts to outperform a relevant index
through superior stock-picking techniques. The assets of an index
fund are managed to closely approximate the performance of a
particular published index. Since the composition of an index
changes infrequently, an index fund manager makes fewer trades, on
average, than does an active fund manager. For this reason, index
funds generally have lower trading expenses than actively-managed
funds, and typically incur fewer short-term capital gains which
must be passed on to shareholders. Additionally, index funds do
not incur expenses to pay for selection of individual stocks
(proprietary selection techniques, research, etc.) and deciding
when to buy, hold or sell individual holdings. Instead, a fairly
simple computer model can identify whatever changes are needed to
bring the fund back into agreement with its target index.
The performance of an actively-managed fund largely depends on the
investment decisions of its manager. Statistically, for every
investor who outperforms the market, there is one who
underperforms. Among those who outperform their index before
expenses, though, many end up underperforming after expenses.
Before expenses, a well-run index fund should be average. By
minimizing the impact of expenses, index funds should be able to
perform better than average.
Certain empirical evidence seems to illustrate that mutual funds
do not beat the market and actively managed mutual funds
under-perform other broad-based portfolios with similar
characteristics. finds that nearly 1,500 U.S.A. mutual funds
under-performed the market in approximately half the years between
1962 and 1992. Moreover, funds that performed well in the past are
not able to beat the market again in the future (shown by Jensen,
1968; Grimblatt and Titman, 1989. However, as quantitative finance
is in its early stages of development more accurate studies are
required to reach a decisive conclusion.
Bond funds
Bond funds account for 18% of mutual fund assets. Types of bond
funds include term funds, which have a fixed set of time (short,
medium, long-term) before they mature. Municipal bond funds
generally have lower returns, but have tax advantages and lower
risk. High-yield bond funds invest in corporate bonds, including
high-yield or junk-bonds. With the potential for high yield, these
bonds also come with greater risk.
Money market funds
Money market funds hold 26% of mutual fund assets in the United
States.Money market funds entail the least risk, as well as lower
rates of return. Unlike certificate of deposits (CDs), assets in
money market funds are liquid and redeemable at any time. The
interest rate quoted by money market funds is known as the 7 Day
SEC Yield.
Hedge funds
Hedge funds in the United States are pooled investment funds with
loose SEC regulation, and should not be confused with mutual
funds. Certain hedge funds are required to register with SEC as
investment advisers under the Investment Advisers Act. The Act
does not require an adviser to follow or avoid any particular
investment strategies, nor does it require or prohibit specific
investments. Hedge funds typically charge a fee greater than 1%,
plus a "performance fee" of 20% of a hedge fund's profits. There
may be a "lock-up" period, during which an investor cannot cash in
shares.
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