Investing in today’s market: A rough guide to Mutual funds

Types Of Mutual Funds

Types Of Mutual Funds

Learn about the different Types of Mutual Funds in this mutual fund tutorial. Which mutual fund is right for you?


Asset Allocation

Asset allocation refers to the division of your portfolio to different asset classes such as money-market securities, bonds, stocks and their appropriate subcategories. An asset allocation fund follows this principle by holding several asset categories. One of many Types Of Mutual Funds.

Balanced Funds

These funds invest in a combination of bonds and stocks of various sorts depending on their stated objectives.

Closed-End Funds

The opposite of open-end funds, closed-end funds place their shares on the exchange so investors can buy or sell like over-the-counter stocks. Because shares can be traded at discount, NAV, or premium, close-end funds introduce an additional dimension of risk and return.

Convertible Bond Funds

A convertible security gives the holder the right to convert one type of security into a stipulated amount of another type at the investor’s discretion. Convertible Bond Funds invest in bonds that can be converted into preferred or common stock. The benefit is that if an issuing company performs well after the issuance of the convertibles, the fund will be able to gain by converting the bonds into the now-more-valuable stock.

Advantages to Issuing Companies on these Types Of Mutual Funds

Lower interest rate on its debt – The fund is, in effect, substituting the certain stream on interest payments for the uncertainty of the growth prospects for the uncertainty of the growth prospects of company that issues the bonds.
They represent potential common stock – This future common stock feature may be desirable for a firm that currently needs equity capital for an investment but does not want to issue common stock immediately because of the potential dilution before the investment begins generating earnings.

Advantages to Investors on these Types Of Mutual Funds

They provide the upside potential of common stock and the downside protection of a bond – The upside potential occurs because convertible bonds contain an option to buy stock by simply surrendering the bond. If the stock price increases, the convertible bonds gain in value due to the increase in value of the stock into which it can be converted. The downside protection occurs because, irrespective of what happens to the stock, the price fo the bond will not decline below what it would be worth as a straight bond.

Corporate Bond Funds

A portfolio that holds investment-grade corporate debt, or that rated triple-B or higher. Due to the large amount of high-quality corporate bonds in the market, funds normally restrict their holdings to issues of single-A or better. Both however may own Treasury securities.


A portfolio whose focus is on corporate bonds with a rating of triple-A or double-A.


A portfolio whose focus is on corporate bonds with a rating of double-B or lower that pays a higher yield to compensate for the higher risk. These bonds are also know as junk bonds.

Currency Funds

Instead of market securities, this portfolio holds currency of other countries that are stronger than the U.S. dollar. If a another country’s currency increases, the fund will set a upper-limit and convert the currency to US dollars. Sometimes the fund to convert the currency into another foreign currency to avoid losing their gains with the US dollar. Currency funds offer no protection against losing your investment. Currency against the US dollar tend to go up slow and down fast.

Communications Funds

This fund invests in bonds and stocks of communication companies. Communications funds offer some of the highest gains but also offer some of the highest losses. In the past decade the communications industry has experienced considerable growth due to the high demand for information technology and the Internet.

Diversified Emerging Markets Funds

There has been a significant increase in the amount of emerging markets during the 90s, and along with them, a large number of funds that have been targeting them. Emerging markets are very risky; diversification is extremely important in case the market fails. Emerging markets have the highest gains due to the amount of room for growth within theirs and world economies. These funds invest in all types of securities for the emerging markets.

Equity Funds

Income – A portfolio whose focus is on stock with high-dividend yields.
Europe – An equity fund type portfolio whose focus is on stocks of European companies.
International – A portfolio whose focus is on investing in securities around the world. This helps to protect the investor in case one market is in a slump. This also makes it easier for investor to not miss the boat if an international market were to perform particularly well.
Pacific – An equity fund type portfolio whose focus is on stocks of companies located in the pacific rim region.
World – An equity fund type portfolio whose focus is on stock from companies around the world.

Financial Funds

These types of mutual funds invest in financial institutions like banks and investment firms. Many financial funds offer high return with a little less risk. Financial funds that have the highest returns most often fail because they invest in small financial institutions that cannot compete with larger firms such as Chase Manhattan and Fidelity Investments.

Fund Of Funds

These types of funds actually invest in other existing funds. These funds are more secure because the multi-factor of reduced risk.

Government Bond Funds

Funds that invest in bonds issued by the US government agencies, such as the Resolution Funding Corporation or the Federal Land Bank; also called agency securities. US government bonds are the most credit-worthy of all debt instruments since they are backed by the full faith and credit of the US government, which if necessary can print money to make payments.
Treasury – Long-term debt instruments with maturities of 10 years or longer issued in minimum denominations of $1,000

Growth Funds

A fund whose focus is on company securities with good or improving profit prospects. The primary emphasis is on appreciation for the fund’s shareholders over the long-term.
Aggressive – These funds hold stocks of rapidly growing companies. They are designed solely for capital appreciation, since they produce little or no income for dividends. Investors in aggressive growth funds will see that the value of their shares will fluctuate sharply over time.

Hedge Funds

A portfolio whose focus is on both U.S. and non-U.S. securities and take both long and short term positions using leverage and derivatives. Hedge funds take large risks on speculative strategies, including program trading, selling short, swaps, and arbitrage. The fund may not use all these tools, but have them at its disposal.

Hedge funds require for these Types Of Mutual Funds:

  • 65% of its investors must be accredited, defined as an individual or couple who have a net worth of at least $1 million, or an individual/couple who had a previous income of at least 300,000 respectively.
  • Minimum investments ranging from $250,000 to $10 million dollars.
  • Lock-up on first-time investors for up to one year.

Income Funds

Income funds focus on creating an income for investors. All distributions from income funds are taxable in the year received by the shareholder unless the fund is held in a tax-deferred account such as an IRA or the distributions are from tax-exempt bonds.

Index Funds

Index funds focus on matching broad based portfolios like the S&P 500, DJIA, or even foreign indexes. The principal is to have gains when the economy is good and sell when the economy is down. Index funds are the easiest to monitor and predict because the amount of current day research that is done of the condition of the economy.

Municipal Bond Funds

A portfolio whose focus is on bonds issued by a state or local government entity.

Option Income Funds

A conservative options fund that buys stocks and increase shareholders’ income through the premium earned by selling put and call options on the stocks in the fund’s portfolio.

Real-Estate Funds

Funds that invest in land and all physical property related to it. These funds try to anticipate the increase in value for real-estate and sell at the target price.

Sector Funds

Also known as specialized funds, these funds focus on one industry, such as communications or utilities. The benefit is that investors have higher gains when their sector is performing well. The downside is that sector funds are not diversified and lose value when the sector does poorly. Some sector funds invest in bonds to reduce the risk.

Small Company Funds

These funds invest in bonds and common stock of small companies that have high potential to succeed. The key to reduced risk is diversification among industries.

Total-Return Funds

Total return funds focus on getting the “total-return” on the securities it holds. For bonds this means holding to maturity. With stocks, fund managers use the price/earnings ratio to calculate future appreciation. In options trading, managers focus on dividends, capital gains and premium income.

These are some of the best Types Of Mutual Funds for investors.

Types of Mutual Funds Tutorial

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