various types of mutual funds and its uses
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Types Of Mutual Funds
What is Mutual Funds?Let's imagine you just overheard the followingconversation among three friends:• 'I had a great year last year. My mutual fund wasup 10%.'• 'Oh, yeah? Mine was up 12%.'• 'Oh, my. Mine was down 1%.'If you have a mutual fund of your own, you mightbe able to jump right into the conversation. But ifyou don't have the slightest clue what thesepeople are talking about, you're not alone.A mutual fund is a basket of various investments,such as stocks, bonds, and cash. A mutual fund isfunded by the investments of individual investorsand institutions.
Types of Mutual Funds
1. Money Market Funds2. Fixed Income Funds3. Equity Funds4. Balanced Funds5. Index Funds6. Specialty Funds7. Fund-of-Funds
Money Market Funds
• These funds invest in short-term fixed income securities suchas government bonds, treasurybills, bankers’ acceptances,commercial paper andcertificates of deposit.• They are generally a saferinvestment, but with a lowerpotential return then other typesof mutual funds.• Canadian money market fundstry to keep their net asset value(NAV) stable at $10 per security.
Fixed Income Funds
• These funds buy investments thatpay a fixed rate of return likegovernment bonds, investment-gradecorporate bonds and high-yield corporate bonds.• They aim to have money coming intothe fund on a regular basis, mostlythrough interest that the fund earns.• High-yield corporate bond funds aregenerally riskier than funds that holdgovernment and investment-gradebonds.
Equity Funds• These funds invest in stocks. Thesefunds aim to grow faster than moneymarket or fixed income funds, so there isusually a higher risk that you could losemoney.• You can choose from different types ofequity funds including those thatspecialize in growth stocks (which don’tusually pay dividends), income funds(which hold stocks that pay largedividends), value stocks, large-capstocks, mid-cap stocks, small-cap stocks,or combinations of these.
Balanced Funds• These funds invest in a mix ofequities and fixed income securities.• They try to balance the aim ofachieving higher returns against therisk of losing money.• Most of these funds follow aformula to split money among thedifferent types of investments.• They tend to have more risk thanfixed income funds, but less risk thanpure equity funds.• Aggressive funds hold more equitiesand fewer bonds, while conservativefunds hold fewer equities relative tobonds.
Index Funds• These funds aim to track theperformance of a specific index suchas the S&P/TSX Composite Index.• The value of the mutual fund willgo up or down as the index goes upor down.• Index funds typically have lowercosts than actively managed mutualfunds because the portfolio managerdoesn’t have to do as much researchor make as many investmentdecisions.
Specialty Funds• These funds focus onspecialized mandates such asreal estate, commodities orsocially responsible investing.• For example, a sociallyresponsible fund may investin companies that supportenvironmental stewardship,human rights and diversity,and may avoid companiesinvolved in alcohol, tobacco,gambling, weapons and themilitary.
Fund-of-Funds• These funds invest inother funds.• Similar to balancedfunds, they try to makeasset allocation anddiversification easier forthe investor.• The MER for fund-of-funds tend to be higherthan stand-alone mutualfunds.
4 Common Approaches To Investing1. 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 orcountry.
2. Bottom-up approach – focuses on selecting specific companies thatare doing well, no matter what the prospects are for their industry orthe economy.
3. A combination of top-down and bottom-up approaches – A portfoliomanager managing a global portfolio can decide which countries tofavour based on a top-down analysis but build the portfolio of stockswithin each country based on a bottom-up analysis.
4. Technical analysis – attempts to forecast the direction of investmentprices by studying past market data.
