Types of Mutual Fund

 Understanding the types of mutual fund available will help you choose your investment whether from the top 20 best funds list or from your own research.

 Broadly speaking, funds can be offshore or onshore. All types of mutual funds that are found onshore can be found offshore as well. Their offshore/onshore status is simply determined by where the fund is domiciled.

 Different funds have different levels of risk and reward. It is widely accepted that the higher the potential return the higher the risk. Generally this is true. However, where offshore funds are concerned a high-yield fund need not necessarily have any more risk than a lower yielding onshore fund. With offshore funds, the risk is more a factor of the fund's volatility rather than the actual return. While all funds have some level of risk the high-return = high-risk belief is somewhat a myth when it comes to offshore mutual funds.

 There is a fundamental difference between offshore and onshore funds that can contribute to the disparity in returns between onshore and offshore. This is the fact that, onshore, a fund is very restrictively regulated according to its actual investment strategy. If the fund rules state investment ratios in certain market sectors, it must comply even if there is a downturn in those particular sectors. The fund cannot easily change it's investment strategy.

 An offshore fund on the other hand, while still regulated, is able to adjust it's investment strategy in order to reduce exposure in downturn markets and capitalize on growth markets.

 At the most fundamental level, mutual funds can be of two types, either Closed-end funds or Open-end funds.

 Closed-end funds have a set number of shares from the beginning. The shares in the fund are traded on the open market which makes them subject to the law of supply and demand. Shares are not redeemed by the fund and no new shares are issued. These shares normally trade at a discount to the NAV.

 Open-end funds make up the majority of mutual funds. There is no set number of shares. Shares are created when you make your investment and redeemed when you sell your investment. Therefore they reflect the NAV of the funds investments.

 You will also come across the terms Professional funds, Private funds and Public funds. These terms refer to the parties who have access to the funds. For instance, professional funds are for professional investors who make an investment minimum of US$100,000. Private funds have fewer than 50 investors and are prohibited from offering shares in the fund to the general public.

 That said, at the basic level, mutual funds are variations of three types of asset classes:

  1.      Money Market funds are safe, low return funds. They invest in short term debt instruments and can be okay places to park your money for a while. Their returns are better than the banks and your capital is very safe.

  2.      Income funds are aptly named because they are designed to provide an income on a steady basis. Bond fund, income fund and fixed-income fund all mean the same type of mutual fund. They invest mostly in corporate debt and government bonds.

 While good funds for conservative investors, bond funds can vary considerably depending on the type of bonds they invest in.

 Also, bond funds are affected by interest rates. If rates go down the value of the fund rises and vice-versa. Bonds can actually be bought directly as well as through a bond fund. But the two methods are not the same thing. If you invest in bonds directly they are a true fixed income investment. Calling a bond fund a fixed-income fund is a misnomer because the fund has no real obligation to produce a particular yield or even preserve your capital. A bond fund like any other fund can vary it's exposure to risk at the discretion of the fund manager so it is closer to an equities fund in character than an individual bond.

  3.      Equity funds make up the largest group of mutual fund types. They invest in stock (shares of companies) with the objective being some income but mostly long term capital growth that is, the aim is for the companies to increase in value as time goes by. Because there are so many different types of equities there is a big range of equity fund types.

Growth funds - are equity funds investing in fast growing companies. Generally these are small companies (small cap) often in startup technologies which have good growth prospects.

Value funds - at the other end of the scale is a fund investing in large companies (large cap) which are in good financial shape but whose share price has fallen (i.e. the shares are good value).

Both growth and value funds can apply to large cap, mid cap, or small cap companies. It a fund invests mostly in one size of company the fund will adopt that term (e.g. large-cap fund, mid-cap fund or small-cap fund).

Blend funds - these are a compromise between growth and value and can also apply to large, medium and small companies.

Specialty funds - also known as Sector funds, these are equity funds that specialize in investing only in companies that are in the same sector or the same geographical region. These funds are often very volatile. Property funds are a form of specialty fund.

Index funds - try to match or outperform a chosen broad market index such as the Dow Jones or the S&P500. Index funds have lower fees because there is no selecting of certain stocks by highly paid professionals. They have the same stocks as are listed on the index they seek to replicate.

International funds - also known as Foreign funds, these invest only in investments outside of your home country (or the country where the fund is domiciled).

Global funds - like Foreign funds they invest all over the world but also include investments in your home country (i.e. the country of domicile).

Balanced Funds - are a combination of equities and income investments. The aim is to provide a balance of income and growth as well as safety. The weighting for income and the weighting for capital growth is often restricted to set maximums and minimums for each asset class.

Asset Allocation funds - these are balanced funds where the fund manager has the flexibility to vary the ratio of the fund's asset classes according to movements in the economy and changes in market sectors.

 So now you are familiar with the types of mutual funds in existence. As you search for the best performing mutual fund types your due diligence will be more meaningful because you will have an understanding of how the fund operates and the risks associated.

You are here:
Types of Mutual Fund - a listing and explanation of all the different types of funds onshore and offshore.

Mutual Funds - An explanation of what they are.

Mutual Fund Investing - How funds make money, how you make money from them, explanation of distributions and some special dates.

Offshore Investing Mutual Funds - an outline of why offshore funds beat all, and a bit about taxation.

Advantages - a discussion of the advantages and the disadvantages of these funds.

Offshore Investments - how to go about making your offshore investment through an offshore trust.

Understanding the Mutual Fund Prospectus - an explanation of some of the main things to look for when reading a prospectus.

Choosing a Mutual Fund - 6 important things to consider before making your decision to invest in a particular fund.

Compare Mutual Funds - how to analyze what the 1 year, 3 year, 5 year and 10 year returns mean, and how to compare funds with those figures.

Mutual Fund Managers - A very comprehensive list in alphabetical order of many of the managers of mutual fund families around the world.