Overview of Mutual Fund Types
Uploaded by
venkatOverview of Mutual Fund Types
Uploaded by
venkatMutual Fund Types
Fund Type Investment Investments Risks Client Suitability
Objectives
INCOME
Money Market - Stable returns -MM investments - Low interest rate risk -Risk averse investors
- Safety of capital & with term < 1 year - Low default risk -Parking money
liquidity -avg term < 90 days -Short-term
Mortgage - Current income from -NHA insured - Lower default risk – -want safety of capital
mortgage portfolio mortgages mostly NHA guaranteed with a steady stream of
- Safety of capital - Lower interest rate risk income (lower than bond
- shorter terms & fund due to lower risk)
monthly principal
payments
Bond - Current income -gov’t, corporate & - Interest rate risk -safety & income
- Safety of capital foreign - Default risk
- Some capital gains - ST & LT
Dividend - tax preferred income -mostly preferred - Interest rate risk -moderate risk takers
- DTC shares -Default risk -want steady tax-
- Safety of capital -some blue chip -market risk preferred income with
m
common shares capital gains potential
er as
Growth &
co
Income
eH w
Balanced - Current income -bonds & stocks - Most try to time the -moderate risk taker
o.
- Capital gains - req’d minimum of market -wants income & capital
rs e
- Safety of capital each -interest rate risk
-default
gain potential
ou urc
-market, business
Asset Allocation - Current income -bonds & stocks - try to time the market -moderate to high risk
- Capital gains -usually no -interest rate risk taker
o
- Safety of capital restrictions on asset -default -want income & capital
mix -market, business gains
aC s
Growth
vi y re
Equity - Capital gains -primarily common - Market risk -moderate to high-risk
- Current dividend shares -Business risk investor
income -small/large -depends on fund focus -seeking LT capital
companies, specific growth
ed d
sector
Equity - index - Capital gains -common shares in -market risk
ar stu
- Match performance specific index -business risk
of index
- Lower fees
Global equity - Capital gains -common shares in - Market risk of country -moderate to high risk
is
foreign countries -Foreign exchange risk investors who want
Th
-Liquidity & efficiency international
of capital markets diversification
-Business risk
Specialty - Capital gains -common shares in - Lack of diversification -high risk investors
specific industry or - Commodity price
sh
geographic area changes
Real Estate -tax advantaged -commercial & -property risk -high risk investors
income industrial property -liquidity risk seeking tax advantaged
-capital gains -interest rate risk income - LT
-economic risk
Commodity -capital gains -derivatives & -commodity risk -sophisticated, high risk
Pools physical -trading risk investors
commodities
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Mutual Fund Types – 2
1) Complete the matching exercises below:
m
er as
co
eH w
o.
rs e
ou urc
o
aC s
vi y re
ed d
ar stu
is
Th
sh
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1) Money Market ________
2) Money Market ________
3) Asset Allocation ________
4) Mortgage _______
5) Mortgage _______
6) Bond ________
7) Bond ________
8) Dividend __________
9) Equity _________
10) Equity _________
11) Balanced ________
12) Global __________
13) Global __________
14) Specialized ____________
15) Real estate _________
16) Equity – index __________
17) Equity – index __________
m
er as
a) Mostly NHA guaranteed
co
b) Business risk
eH w
c) Lack of diversification
d) Foreign exchange risk
o.
e) Safety & liquidity
f) rs e
Match market performance
ou urc
g) No restrictions on asset mix
h) Lower fees
i) Low interest rate risk – shorter maturity
j) Interest rate & default risk
o
k) Adjust asset mix to time the market
aC s
l) Some capital gains
vi y re
m) Commercial & industrial properties
n) Liquidity & efficiency of capital markets risk
o) Tax-advantaged income (DTC)
p) Market risk
q) Low interest rate risk
ed d
ar stu
is
Th
sh
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Mutual Fund Types - 3
2) Give specific examples of risks in the table below.
Risk Type Example – events causing prices Example – events causing prices
BONDS
Interest Rate Risk Interest up, inflation up
Default Risk Debt/equity ratio down
Liquidity Risk Volume of bonds up
Political Risk Stable majority gov’t, v.b gov’t policy
Foreign Exchange Risk
Maturity Risk
EQUITY
m
Market Risk
er as
co
Business Risk
eH w
Liquidity Risk
o.
Foreign Exchange Risk rs e
ou urc
Political Risk
o
aC s
3) Answer the following
vi y re
1) What is 1 objective of a Mortgage fund?
2) What is one risk of a specialized equity fund?
3) Name 1 risk of an equity mutual fund.
ed d
4) What are the risks of a Money Market fund?
5) What is one risk of a Bond fund?
ar stu
6) In what scenario will interest rate risk have a negative impact on a Bond fund?
7) Why do Mortgage funds have a relatively low default risk?
8) Why is the return of growth style equity funds relatively volatile?
is
9) Name 1 risk of a global equity fund – in addition to the standard risk of equity funds.
10) Name another risk.
Th
11) What is the investment objective of Index Equity funds?
12) What is an advantage of Index Equity funds?
13) Name 1 investment objective of a Money Market fund.
sh
14) What is one objective of a Bond fund?
15) If a fund manager thought that interest rates were going to increase, how would she change the
investment in a bond fund?
16) How is the NAV of a Mortgage fund calculated?
17) What is the usual NAVPS of a Money Market fund?
18) Are you tired of answering questions yet?
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Common questions
Powered by AIGlobal Equity funds are suitable for investors seeking international diversification, as they invest in common shares across foreign countries. However, they come with inherent risks such as the market risk specific to each country, foreign exchange risk, and the liquidity and efficiency of capital markets. Despite these risks, they offer diversification benefits and can manage risks associated with single-market exposure, making them appropriate for moderate to high-risk investors with a global investment outlook .
A Bond mutual fund focuses on current income, safety of capital, and some capital gains by investing in government, corporate, and foreign bonds with varying interest rate and default risks. In contrast, a Mortgage mutual fund aims at current income from a mortgage portfolio and safety of capital, primarily investing in NHA-insured mortgages, which are generally low-risk due to NHA guarantees and shorter terms with monthly principal payments, resulting in lower interest rate risk .
The primary investment objectives of a Money Market mutual fund are stable returns, safety of capital, and liquidity. Investments are primarily in money market instruments with terms less than one year and an average term of less than 90 days. The risks associated with this type of fund are low interest rate risk and low default risk, making them suitable for risk-averse investors looking to park money for short-term investments .
An investor might choose Commodity Pools over traditional Equity funds if they seek the potential for significant capital gains through exposure to derivatives and physical commodities, which can offer unique opportunities not typically available through conventional equities. However, Commodity Pools come with higher commodity and trading risks and are suitable for sophisticated, high-risk investors willing to accept the volatility inherent in commodity investments .
Specialty mutual funds focus on investing in specific industries or geographic areas, offering the advantage of potential high capital gains due to concentrated growth opportunities in niche markets. However, they have significant disadvantages, including a lack of diversification and vulnerability to commodity price changes, making them suitable only for high-risk investors who can withstand volatility and potential market downturns within focused sectors .
Real Estate mutual funds mitigate risks by diversifying their portfolio across commercial and industrial properties, thus spreading specific property risk and economic risk associated with individual investments. Additionally, they aim for tax-advantaged income, which may cushion against liquidity and interest rate risks over the long term, making them suitable for high-risk investors seeking income advantages from real estate investments .
Interest Rate Risk in Bond mutual funds significantly impacts the fund's performance under varying economic scenarios. When interest rates rise, bond prices typically fall, resulting in potential capital losses for the fund. Conversely, in an environment of declining interest rates, bond prices increase, potentially generating capital gains for the fund. This risk is compounded by the fund's duration and the types of bonds held, with longer maturities being more sensitive to interest rate changes, affecting investors' returns under different economic conditions .
Equity Index funds primarily aim to match the performance of specific indexes, resulting in relatively lower fees and inherent market risk and business risk associated with the index components. On the other hand, Dividend mutual funds focus on tax-preferred income and safety of capital through investments in mostly preferred shares and some blue-chip common shares. Dividend funds face interest rate, default, and market risks, appealing to moderate risk takers seeking steady income with potential capital gains, contrasting with the broader market exposure and lower costs of index funds .
Foreign Exchange risk in global equity and bond funds arises from fluctuating currency values affecting the fund's returns when investments in foreign currencies are repatriated into the investor's home currency. This risk can result in loss or gain depending on currency movements. In global equity funds, this risk adds to market and business risks, whereas in bond funds, it compounds with interest rate and default risks, making it essential for investors to consider currency trends and hedge appropriately .
An investor might opt for a Balanced mutual fund if they seek current income coupled with capital gains while aiming for safety of capital through a stable mix of bonds and stocks, with a required minimum of each. This type of fund is suitable for moderate risk takers who prefer consistency and predictability in asset distribution. Conversely, an Asset Allocation fund, which usually has no restrictions on asset mix and attempts to time the market, may attract investors willing to accept higher volatility for greater income and capital gain potential, suitable for moderate to high-risk takers .