Types of Mutual Funds

It's not enough to know what is the historical ROI of the mutual fund you want to invest in. The future profitability depends on more factors than that - the management, the economical conuncture etc. One of the most important factor is the type of the mutual fund you invest in. That's why it's always a good idea to know more about the different types of mutual funds.

We don't need to go into too much details and financial terms here, neither to mention funds categories that you will never want to invest you. I am going to list only the most popular types of mutual funds with short information about their specifics.

Stock Mutual Funds

Obviously, they invest in the stock market. In most cases they are riskier than the other types of funds and can perform better than them. They can be Bull or Bear stocks funds depending on the positions they take in the market.

The Stock mutual funds are probably the most popular of a kind. However they rare exist in their clear definition as usually the funds invest also in bonds in other lower risk opportunities. This turns them into Balanced Funds.

Balanced/Mixed Mutual Funds

This kind of funds combine stocks with other income and growth objectives - bonds, bank deposits, etc. This usually allows the funds to be sub-divided in 3 main categories:

Conservative - invest in more bonds and bank deposits than stocks

Balanced - invest in stocks and bonds almost equally

Aggressive - they are closer to the ideal type of stock fund as they invest mostly in stocks and put only small reserve in bonds/deposits

If you are new investor, the Balanced Mutual Funds are probably the best choice for your first investition. What exactly of them you will choose depends on your willing to risk and make profits.

Bond Mutual Funds

They involve the lowest risk, but also the lowest profit. Very conservative, they invest only in government issued bonds and their ROI barely exceeds the interest given by your local bank. I can see no reason for you to invest in bond mutual fund.

Index Mutual Funds

They are not so popular (I wonder why?), but usually offer a very good risk/reward ratio. What exactly they do? They simply choose a market index (for example some national Top 10, or Dow Jones etc) and invest in the companies from that index. This strategy often allows them to achieve better ROI than even the aggressive stock funds.

Another advantage of the index funds is that because of the low operational expenses (there is no need of expert analysts to choose when to sell and buy the stocks) the comissions are much lower than in most other types of funds.

The only big issue is that if the index start going down, the fund manages will do nothing to stop the loss - simply because the fund is created to follow the index and nothing else.

Income Funds

Some companies present this like a separate type of fund, but basically it's inside realization can classifty it in many of the other types. Mostly the Income Funds try to provide their investors with long term steady profits without taking too much risk. That's why they invest in bonds, stocks which pay high dividents, or government securities.

The Income Funds are most appropriate for long-term and conservative investors.

Option and Futures Mutual Funds

The most aggressive investors will like this type of funds. These funds invest (obviously) in options and futures (See Wikipedia's articles on Options and Futures). This means they are mostly speculating on the market with securities they do not own, aiming to achieve the highest returns or sometimes to hedge their positions.

The Options and Futures mutual funds offer the highest potential profits, but also the highest risks. They are highly unsuitable for beginner investors!

Market Neutral Mutual Funds

They try to offer higher profits than the government secured funds with zero risk. They try to achieve that by hedging long and short positions and calculate the total risk to 0.

These funds are not too popular because they rare succeed in accomplishing the goal of high profits.

Funds of Funds

The idea behind them is very simple - they invest in other mutual funds. This way you are basically diversifying in many mutual funds without the need to really invest in all of them. This limits your risks.

The biggest disadvantage is that you pay double fees (once the fees the fund of funds pays to the mutual funds they invest in; second time the fees you pay to the fund of funds.

The benefit of investing in fund of funds is questionable, because even investing in one mutual fund you already are diversifying between different securities.

Socially Responsible Funds

These mutual funds aim to invest only in companies which meet some ethical and moral criteria. This is of course very subjective - but in most cases these funds invest in "green" companies, new technologies, hospitals, educational institutions etc. For example they never invest in alcochol, tobacco or gambling companies.

The level of risk and profit varies a lot with these funds. That's why they are most appropriate if you look for socially responcible investing.

Unit Investment Trusts (UITs)

Although technically the Unit Investment Trusts are not mutual funds, they can be classified as such because what they do is very similar. They pool investor's funds and buy various securities, then distribute the profits.

The main difference is that the UITs have an expiration date. Another specific is that they can not be purchased on the open market, but only from the issuing companies.

Let's stop here - you can really find hundreds of types of mutual funds to be discussed on the Net, but most of them are more or less variations of these general types.

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