What are the Different Types of Investment Funds?
Investment funds, also known as collective investment schemes or managed funds, are group funds of money where people pool their assets together to allow them to access investment opportunities that otherwise would not be available to them. Since many investments have minimum buy-ins, often a single buyer at the consumer level would be unable to purchase even the minimum amount, but by pooling funds together with many other investors, the money can be invested and the profits or losses shared among the group. Since investments may have costs associated with them, as well, investment funds allow these costs to be reduced by being spread out over many people, rather than borne by each individual. There are two main types of investment funds in the United States: mutual funds and exchange-traded funds (ETFs).
Mutual funds are the backbone of the collective investment scheme in both the United States and Canada, although the term is more generally in other parts of the world to simply refer to all types of investment funds. Mutual funds take money from the collective group, pooling it together to invest in securities like stocks and bonds. Mutual funds are managed by a fund manager, who handles all of the money in the fund, choosing the investments themselves, usually based on certain criteria.
Worldwide, mutual funds make up an enormous block of investment capital, representing some $26 trillion US Dollars (USD) in value. As their value has grown in the past few year, fund managers have become some of the highest paid individuals on the planet, with the most successful fund managers making billions of dollars annually. There are many different types of mutual funds, each with their own focus and strategy.
Growth investment funds, for example, assume a growth market, buying low and selling high, and can yield considerable gains. The point of their investment is not in receiving dividends, so their short-term yield is not optimal. They do very well in bullish markets, outperforming the S&P during these times, but conversely can be hit quite hard during bear markets. For this reason, they carry a fair amount of risk as well as the potential for reward, and so are not ideal for risk averse investors. Aggressive growth funds are a subclass of aggressive funds, but they may borrow funds or trade stock options in order to further leverage the money held in the fund.
On the other end of the spectrum, growth-income investment funds are fairly conservative, specializing in blue chip stocks. They buy things like the Dow industrials, utilities, and other stocks that are generally non-volatile. Investing in a growth-income fund is similar to investing conservatively in the stock market directly, but with the benefits of pooling resources under a fund manager.
An exchange-traded fund (ETF) is similar to a mutual fund, in that it is a vehicle for holding other securities, but it is publicly traded on the stock market, much like a stock itself. One can invest in an ETF as though one were buying a stock, but instead one is buying a collection of stocks and bonds, helping to immediately diversify one's portfolio.
I would like to understand the behavior of fund managers and their motives when investing in mutual funds. Can we separate performance from the investment return?
Sneakers41- I agree with you. I think index funds are excellent investments. I focus on equity investment funds like Vanguard S&P 500 and the Total Stock Market Index. These are index funds that offer equity investments that represent the entire US stock market.
If you are thinking about investing in these mutual funds or any other mutual funds it is best to obtain a prospectus. A prospectus is a booklet that tells you everything about that mutual fund.
It tells you the holdings, the fund manager, the expenses, and the performance of the mutual fund.
Vanguard, T. Rowe Price, and Fidelity are well-known discount fund families that offer a wide variety of high quality discount mutual funds.
You can always talk to an investment advisor over the phone, from any of these companies, if you have any questions regarding any of their funds.
Sunny27- I love Morningstar. I always look at Morningstar before I purchase a mutual fund. I'll look at the performance of the mutual fund, the expense ratio, and the tenure of the money manager managing the fund. The longer the tenure of the money manager the more stable the mutual fund is.
It is best to buy investment index funds. These funds are well diversified and have razor thin expense ratios. Vanguard is one of the top fund families that offers a great amount of low-cost mutual funds.
Many of these funds are self managed or index funds. They usually perform better than managed funds which save you money and gives you a better return on your investment. Avoid mutual funds with Shares A or Shares B in the title.
That means that there is a 5% to 6% upfront commission that must be paid for Shares A fund, while Shares B fund spreads the commission over a period of seven years.
These types of funds make it harder for you to earn money on your investments. They are called loaded funds and they are the most expensive funds to purchase.
Subway11- When investing in mutual funds it is really important to consider the risk allocated to that fund.
Mutual funds are offered a beta rating that can tell you if the fund is conservative or aggressive. For example, an average beta rating of 1.0 means that the mutual funds offers an average level of risk.
Anything rated higher than the 1.0 indicates a more aggressive and volatile mutual fund. Anything below the 1.0 would rating would indicate a more conservative investment.
You can also look at the investment funds performance of an individual mutual fund or the entire sector by looking at MorningStar.
MorningStar rates all major investments from mutual funds, to commodity investment funds, to basically all top investment funds and gives it a star rating.
When looking at retirement investment funds is really a good idea to consider mutual funds investments.
Buying funds with a target retirement date offer diversified asset allocation based on how many years you have toward retirement. These funds are a good choice if you are not sure where to start.
I think mutual investment funds offer the most diversification regarding equity investments.
Since mutual funds are invested in a variety of companies instead of a single company like in a stock for example, it is less risky to invest in mutual funds than it is investing in a stock.
For example, if a company goes bankrupt and that's the only stock you have your entire portfolio will be wiped out.
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