Open End Mutual Funds
All mutual funds by default and by definition are open end funds. Here an investor can buy the shares at any point of time and exit from it at any time of his choice. Both buying and selling will be at the current NAV subject to load factors where ever applicable. Though this is a very broad category, one can easily say this is the most popular of the lot looking at the ease with which one can liquidate his holding (exit from position by selling or redemption to the trust/fund). Affordability is another key factor that decides the popularity of open end funds. Those who can not afford high initial prices can buy with low dollar values and even on a monthly basis.
Closed End Mutual Funds
Selling off of a specified and limited number of shares by the mutual funds at an initial public offering is known as closed end mutual fund. However one important difference between open end fund and closed end mutual fund is that the price of the latter is decided by demand and supply of the stock in the market and not by NAVs unlike in the former case. The pooled funds are utilized as per the mandate of the fund and Securities and Exchange Commission's regulations. They are traded more like the general stocks. Some of the reasons to invest in this category
- Prices are determined by market demands and thus closed end funds trade at lower than the offer price more often than not which is a perfect time for buying (at discounted prices)
- Like in the open end funds there are wide options for you to choose from. Like stock funds, balanced funds that give full asset allocation benefit and thirdly the bond funds.
Exchange Traded Funds
The Exchange Traded Funds are a basket of stocks and trade like a normal security on exchanges tracking index much like index funds. The prices of the ETFs are determined by market forces and thus no NAVs can be fixed. The advantages of ETFs include buying and selling like you can do with any stock traded on the exchange not excluding short selling while you enjoy the diversification of an index fund. There no fees/loads on these funds other than the commission you pay to the broker. There are many popular funds in this class and one of them is SPDR that tracks S&P 500 index.
Other Types of Mutual Funds That Invest In Multiple Sectors
Money Market Funds
A conservative and short term allocation of funds that yield moderate returns but the funds emphasize on preservation of capital.
Balanced and Growth Funds
A relatively aggressive fund that focuses on higher returns and capital appreciation. Another important feature of this type of funds is they are highly diversified reducing market risks
Index Funds
Goal of index funds is to match the market performance by investing on index heavy weights. This can be a bond index fund or a stock index fund. For the latter type Dow Jones is an example and they follow the 30 stock index. Low expenses are the advantage.
Combination Funds
There are a number of combination funds available in the market. For income you have income funds that invest in mainly government bonds and some times in private sector debt instruments too. These are also called as bond mutual funds. The aim of such funds is to provide a guaranteed regular income to investors. The values of units/shares are determined by the fluctuating rates of interest. Higher the rate of interest on the bond instruments higher is the price of shares. There is a whole host of options in the category with multiple combinations to choose from.
Pure Stock Funds
The main type of funds under this category are aggressive ones and the first concentrates on growth by investing in such companies that have potential to an explosive growth. You should not forget that other side of high growth potential is high risk element. These funds do not usually pay dividends at all. Buying them is at your risk of going bankrupt of the entire fund. The other types include, funds invested in large caps stocks, mid stocks where in their share value is stable or the fluctuation is minor. On the flip side the dividends paid by such companies are not usually attractive.
Growth Funds and Growth and Income Funds
Growth funds concentrate on bigger growth potential but keeping an eye on the dividend income too. The asset allocation in growth funds is spread on both but with skewness in favor of instruments of high returns. Certain safety factors are in built in to the allocation mechanism here. This is recommendable depending on your risk exposure limit. On the other hand growth and income funds emphasize more on appreciation of the capital employed and dividend income than investing in high growth companies. This is recommendable when your objective is not high returns in a short term but a steady income and a growth in the principle over a period of time.
Load and No-Load Funds
Some funds charge you fees called as loads to cover their expenses to manage your asset/investment. These loads appear to be small but work out to be a very high amount over a long period. Certain funds do charge fees even while claiming they are no load funds. It is important to check out the repercussions of this on your returns after deduction of tax and fees.
Regards-
jyotsna
CAclubindia
