Mutual Funds Types

What are the key types of mutual funds?

The key types of mutual funds represent the fundamental investments that they're in. Types of mutual funds include bond funds, money market funds, equity funds, a REIT fund, and other types that are sector, asset allocations. Mutual funds are categorized for the most part by how they invest, what their investment strategy is. One level above that, technically there's really two types of funds. There's an open-end mutual fund and a closed-end mutual fund.

What is a "closed-end" mutual fund?

When most people are talking about mutual funds, what they're really talking about is an open end fund. There's another type of fund that's a closed end fund, and really the difference between the two is how their shares are handled relative to the mutual fund and the underlying investor. With an open end fund, if you want to buy shares you send in the money to the mutual fund. They actually create more shares and send you shares back of that mutual fund. When you want to sell, you send your shares to the mutual fund company and they send you back money. A closed end fund is actually closed, meaning that the shares have already been established that exist in the marketplace. So if you want to buy shares of a closed end fund, you actually don't go buy the shares from the mutual fund itself. They trade on the stock market, where you'd actually want to go buy those shares from another person who owns the shares and is trying to sell them. So there becomes that secondary market with the closed end fund. Fundamentally, what they do is really the same thing but the difference between open and closed is how their shares are open and sold.

What is a "bond fund"?

A bond fund is just a mutual fund that is going to go out and invest in bonds, or what we would really consider fixed income. Within the bond funds themselves, there could be many different types of strategies. The key factors we want to look at when we're looking at bond funds is the quality of the bonds that the mutual fund is buying. Usually that will be listed in their perspective so if you hear about a junk fund, they're really going out and buying poor quality bonds. The other thing you might be concerned with is what's the term? Is it a short term bond future or a long term bond fund? That's going to have a factor on what its expected yield is going to be and the expected price volatility within that bond fund.

What is a "growth fund"?

When we are talking about growth funds and value funds, what we are really talking about, is a stock fund, a fund that is going out and buying equities. The difference between growth and value is the relative quality of a company. Usually it is some type of measure like a price to book, or book to earnings. Value company is a company that is in distress where the market feels that it is in distress, whereas a growth company is a very solid - what we consider a blue chip - company that is doing very well. A growth fund is going to focus on those growth companies where a value fund is really going to try to focus on those value companies.

What is an "aggressive growth fund"?

An aggressive growth mutual fund is an old description of a type of mutual fund. It comes from a group of descriptions - things like aggressive growth, growth, growth in income, equity income. 'Aggressive growth' was an attempt to describe mutual funds but not necessarily in an academic or a technical sense. Today, we are actually going to describe mutual funds differently. They are going to be based on the academic research of the factors that really matter when creating mutual funds. Those factors are really large cap and small cap, and growth versus value in that definition. We see a lot less of the aggressive growth, growth of income and equity income today. Those are really not as descriptive and don't really don't tell us much about the mutual fund and how it is going to react over time.

What is an "index fund"?

An index fund is a mutual fund that buys securities that represent some index. As an example, if we were to take the S and P500 index, an index fund that was representing that index would buy those 500 securities in the same relative weighting as the index has those securities. It's really just implementing that index with real stocks. One of the good advantages of an index fund is they tend to have really low expense ratios and they have very low turnover, which are key factors when looking at the quality and the long term expected returns of a mutual fund.

What is a "sector fund"?

A "sector fund" is a mutual fund that is only going to purchase securities in an individual sector. There's all kinds of sectors in the market. There might be Health care, Biotech, Energy, Transportation, etc. What a sector fund might do is go into the health care industry and only buy securities, and try to find the good securities that are part of that sector of the market.

What is an "asset allocation fund"?

An asset allocation fund is a mutual fund that is trying to provide a very broad diversification amongst various asset classes. It might do that by actually purchasing other mutual funds or might just be purchasing the individual stocks themselves. Traditionally, an asset allocation fund could be the only mutual fund you will need because it's going to provide the asset allocation, meaning it's going to try to buy either funds or securities in different asset classes to provide that broad classification.

What is a "large-cap" or "small-cap fund"?

When we are talking about "large-cap" versus "small-cap" funds what we are really talking about is the stocks the underlying securities in the mutual fund is going out to buy. A large cap fund is purchasing large cap stocks and a small cap fund is purchasing small cap stocks. What does that really mean? Small cap stocks are riskier than large cap stocks, so long-term we have an expectation that a small cap fund is going to do better than a large cap fund. However, it is also riskier so in the short term so we are going to see much greater price volatility with a small cap fund than we are with a large cap fund.

What is an "ethical fund"?

An ethical fund is also what we might call a Socially Responsible Fund. There's an acronym of SRI: Socially Responsible Investing. The purpose of an ethical fund is to buy securities or stocks from companies that are socially responsible, though that really depends on how you define socially responsible. If you're looking at a ethical fund, you want to look at their categories of what they think is socially responsible. There are a lot of different ways to define what is responsible and what isn't, and different funds may approach that a different way.

What is an "emerging market fund"?

An emerging market fund is a mutual fund that invests in stocks from emerging markets. Usually we're talking about countries now. Argentina, Brazil, parts of Asia, just countries that are just starting to emerge. And the, the idea behind that is one, that they're, since they're younger countries, they have a great potential for growth. So there's a high expected return on those stocks. There's also a lot of volatility, a lot of risk, political risk of the countries and those types of things. And then lastly, a reason why you might consider emerging markets as part of your overall portfolio is that the, the economic factors that affect the United States or other developed countries as in Europe don't affect emerging markets the same way. So there can be a diversification value in having emerging markets as part of an overall sound investment strategy.

What is a "foreign fund"?

A foreign mutual fund is a mutual fund that invests in non-US stocks. Usually those are going to be developed countries - Europe, Australia, and the far east developed markets; in the EU countries, the big stable countries. The foreign fund would just be non-US stocks in those types of countries.