Types of Mutual Funds 

Mistakes in Trading .Com

Types of Mutual Funds

Investors can invest in stock funds, bond funds, money market funds, hybrid funds, and commodity funds. Table 14–2 shows the different types of equity fund classifications based on investment objectives.

A stock mutual fund specializes in stock investments. Stock funds vary with regard to the types of stocks the funds choose for their portfolios and are guided by the fund’s investment objectives. The Securities and Exchange Commission (SEC) requires that funds disclose their objectives. For example, a fund might have the objective to seek growth through maximum capital gains. This type of fund then would appeal to more aggressive investors who can withstand the risk of loss because of the speculative nature of the stocks of the unseasoned, small companies in which the fund invests. A conservative equity fund’s objectives are geared more toward providing current income than capital growth. This type of fund invests in dividend-paying stocks, which also would provide for capital appreciation, even though that might not be a primary objective. Growth and income funds seek a balance between providing capital gains and providing current income.

Equity funds also can be classified according to investment style, namely, growth stocks or value stocks or a blend of the two. Value stocks have financial characteristics different from growth stocks. Value stocks generally pay dividends and have low price/earnings (P/E) ratios, whereas growth stocks have high P/E ratios, and the companies tend to have high sales growth rates for a specified period.

Investing in equity funds does not immunize you from the volatility in the markets. In a market downturn, the more speculative stocks in the funds’ portfolios generally decline more than established blue-chip stocks. Share prices of aggressive funds are therefore much more volatile than share prices of conservative stock funds.

Table 14-2
Types of Equity Mutual Funds
Fund Type Objectives
Aggressive growth Seek maximum capital gains; invest in stocks of companies in new industries and out-of-favor companies.
Growth Seek an increase in value through capital gains; invest in stocks of growth companies and industries that are more mainstream than those chosen by aggressive growth funds.
Growth and income Seek an increase in value through capital gains and dividend income; invest in stocks of companies with a more consistent track record than companies selected for growth and aggressive growth funds.
Income equity Invest in stocks of companies that pay dividends.
Index Invest in securities that replicate the market, for example, Standard & Poor’s (S&P) 500 Index, Dow Jones Industrial Average (DJIA).
International equity Invest in stocks of companies outside the United States.
Global equity Invest in stocks of companies both inside and outside the United States.
Emerging market Invest in stocks of companies in developing countries.
Sector Invest in stocks in the sector of the economy stated in the fund’s objectives, for example, energy, health care sector, technology, and precious metals.
Balanced Seek to provide value through income and principal conservation; invest in common stocks, preferred stocks, and bonds.
Asset allocation Invest in securities (stocks, bonds, and money market) according to either a fixed or variable formula.
Hedge Invest in securities (stocks and bonds) and derivative securities to hedge against downturns in the market, interest-rate changes, and changes in currency values.

An index fund is a mutual fund that includes a portfolio of securities designed to match the performance of the market as a whole. An index fund tracks an underlying market index and seeks to match the returns of that particular market index. For example, the S&P 500 Index Fund invests in the stocks of the S&P 500 Index. This strategy does not require active management of the assets in the fund because turnover is low. The stocks are held in the fund until they drop out of the index. Only then are changes made to the fund. The enthusiasm for index funds has spurred growth into other areas, such as mid-cap and small-cap stocks, emerging markets, Europe, Asia, and the Pacific Rim.

A combined stock and bond fund is called a balanced fund. Balanced funds invest in a mixture of stocks and bonds. The equity portion of a fund aims to provide capital growth, and the fixedincome investments provide income for shareholders. The range of percentages allocated to stocks and bonds are stated in the prospectus of the fund.

Generally, the riskier the securities held in a fund, the greater is the potential return and the greater is the potential loss. This statement is true for all types of funds, including stock funds. Much has been written about hedge funds since the disaster at Long Term Capital Management, a Connecticut hedge fund that had to be bailed out by 14 financial institutions. Long Term Capital Management suffered heavy losses in its positions on Russian bonds because of adverse swings in the prices in the currency markets. Yet, in 2001, the Dow Jones Total Market Index of U.S. stocks declined by 12 percent, whereas hedge funds gained 4.4 percent, as measured by the CSFB/Tremont Index (Clements, 2002, p. C1). Table 14–3 defines hedge funds and lists some of their characteristics.

Categories in Trading Mistakes

Lack of Trading Plan
Planning plays a key role in the success or failure of any endeavor

Using too much Leverage
Determining the proper capital requirements for trading is a difficult task

Failure to control Risk
Refusing to employ effective risk control measures can ensure your long-term failure

Lack of Discipline
A lack of discipline can destroy even the most talented and best prepared trader

Useful Advices to Beginning Trader
You can control your success or failure

All about Stocks
Encyclopedia about Stocks. That you should know about Stocks before starting

Forex Glossary
All terms about Forex market

MistakesinTrading.com, 2008-2015
MistakesinTrading.com - don't make mistakes in trading, be a good trader!