|
||
|
Home || FAQs || Amazon.com || Bookshelf || Glossary || Jokes & Quotes || Financial Calculator |
||
|
|
|
|
|
|
What is the Difference between open-end mutual fund and a closed-end mutual fund? Like an open-end fund, a closed-end fund takes money from many investors and turns it over to a professional manager. But in an open-end fund, shares are continually issued as people invest new cash and continually redeemed as investors withdraw money. A closed-end fund raises capital only once, by issuing a fixed number of shares and no more. The shares are traded on an exchange, as stocks are, and their prices fluctuate throughout the trading day, based on supply and demand as well as on the changing values of their underlying holdings. Oftentimes this causes the market price of a closed-end fund to trade either above or below its Net Asset Value (NAV). When this situation occurs and the fund is trading above this price, it is said to be trading at a premium and alternatively when the fund is trading below this price, it is said to be trading at a discount. Most single country funds are closed-end funds. |
Money Market Funds
-
The money market consists of short-term debt instruments, such as
Treasury Bills (T-bills).
This is a safest type of mutual funds. You won't get great returns,
but you won't have to worry about losing your invest dollars. You
can earn twice the amount you would earn in a savings account and a little less than the average
certificate of deposit (CD). If you're in a high tax bracket, you can
invest in tax-free money market funds. Most money market funds come with free
check-writing privileges, just like checking accounts. (Learn more about money
market accounts in out money market section)
Fixed-income or
Bond Funds - Bonds are IOUs. When you buy bonds, you are lending your money to a
corporation or a government agency. A bond fund consist of large amounts of
bonds. Bond funds are also called fixed-income funds because their purpose is to provide
current income on a steady basis. Bond funds typically invest in bonds
of similar maturity (the number of years before you are are paid back the money
you lend). There are three type of bond funds:
1)Short-term fund - invests in bonds maturing in 2 to 3 years.
2)Intermediate-term fund - invests in bonds maturing in 7 to 10 years.
3)Long-tern fund - invests in bonds maturing in 20 years or so.
The main objective of these funds is to provide a steady income to investors. As such, the typical investors for these funds consists of conservative investors and retirees. Bond funds are likely to pay higher returns than certificates of deposit and money market investments, but bond funds aren't without risk. Nearly all bond funds are subject to interest rate risk, which means that if rates go up the value of the fund goes down and vice versa. There is one other type of fund worth mentioning, a fund specializing in high-yield junk bonds is much more risky than a fund that invests in government securities. Junk bonds have low credit ratings and these are issued by companies with high risk of default. For that high risk, you are paid 3 to 4 percentage points in higher interest than government bonds. (Go to our Bonds Section to learn more on bonds)
Stock or Equity Funds - Funds that invest in stock are called stock funds. There are two basic type of stock funds, growth and value. Growth funds invest in growth stocks, which are companies that are experiencing strong growth in revenues and profits. These usually have a high price to earnings (P/E) ratios and/or price-to-book ratios. Growth stocks either don't pay dividend or very little. On the other side, Value funds investment managers invest in high quality companies that are out of favor with the market. These companies are opposite of growth stocks in that, they have low P/E ratios, price-to-book ratios and high dividend yields.
Stock funds can also invest in three types of companies that are defined by the size of their companies (small, medium, and large). For example, small-company stocks usually have a market value (capitalization) of less than $1 billion. Market capitalization is calculated by multiplying the number of existing shares, or shares the company has issued, by the current price per share. For example, a company with 100 million shares of stock with a current market value of $30 a share would have a market capitalization of $3 billion.
These categories are combined in different ways to describe how a mutual fund invests your money. One fund may focus on small-company growth stocks; another may only invest in large-company value stocks. The main investment objective with stocks funds are long-term capital growth with some income. (If you want to learn more about stocks, go to our Stocks Section)
|
What are Exchange Traded Funds (ETFs)? A security that tracks an index but has the flexibility of trading like a stock. Just like an index fund, an ETF represents a basket of stocks that reflect an index. The difference is that an ETF isn't a mutual fund - it trades just like any other company on a stock exchange. Unlike a mutual fund, which have their net asset value (NAV) calculated at the end of each trading day, an ETF's price changes throughout the day from buying and selling.
The best way to think of an exchange traded fund is as a mutual fund
that trades like a stock. By owning an ETF you get the
diversification of an index fund, as well as the ability to sell
short, buy on margin, and purchase in amounts as little as 1 share.
Another advantage is that the expense ratios for most ETFs are lower
than the average mutual fund. When buying and selling ETFs, you have
to pay the same commission to your broker that you'd pay on any
regular stock order. |
Other Types of Mutual Funds:
Index Funds
-
The index fund's assets are invested to replicate the performance of a
existing market index such as Standard & Poor's 500 (S&P 500), an
index of 500 large U.S. company stocks. They are mostly managed by a
computer and don't need a research team, as such, have very low annual
expense for investors. Why the index funds? Over a long period of time,
index funds outperform about 78% of any other type of funds. Plus, index
funds can't underperform the market since it mimics the market exactly.
Unless the fund has high fees and poor management. Look for low
expense ratio index funds such as
Vanguard
S&P 500 index fund (800-662-7447, ticker: VFINX) has only .18% annual expense fee
with minimum initial deposit of $3,000.
International/Global and Regional Funds - An international fund invests only outside your home country. Global funds invest anywhere around the world, including your home country. Most of these funds carry high annual expense fee (well in excess of 1.5 percent per year). It's tough to classify these funds as either more risky or more safe. On the one hand they tend to be more volatile and have unique political risks. But, they can actually reduce risk by increasing diversification. Even though the world's economies are becoming more inter-related, it is likely that another economy is outperforming the economy of your home country.
Regional funds make it easier to focus on a specific area of the world. This may mean focusing on a region (For example, Asia) or an individual country (Japan). An advantage of these funds is that they make it easier to buy stock in foreign countries. Just like for International or global funds, you have to accept the high risk of loss, which occurs if the region goes into a bad recession.
Specialty (Sector) Funds - Specialty funds are also called sector funds because they tend to invest in a specific sectors of the economy such as financial, technology, health, transportation, electronics, etc. These funds are extremely volatile, you may experience big gains, but you must be willing accept that you may lose big. This type of mutual fund defeats the purpose of diversification and carry higher expenses than other type of funds.
Increasing numbers of mutual funds have been coming up with Socially-responsible funds. These invest only in companies that meet the criteria of certain guidelines by avoiding investing in companies whose products or services harm people or the world at large (industries such as tobacco, alcoholic beverages, etc.). The idea is to get a good return on your money while still keeping a healthy conscience.
Hybrid (Balanced) Funds - Hybrid funds invest in combination of different types of securities (mostly in stocks and bonds). The objective of these funds is to provide a balanced mixture of safety, income, and capital appreciation. Thus, a balanced fund. A typical balanced fund might have a weighting of 65% stocks and 40% bonds. These funds are mostly less risky and volatile than funds investing in stocks only. That's because bonds hold up better in an economic down turn and when the economy is good, stock market rises.
A similar type of fund is known as an asset allocation fund. It's objectives are similar to those of a balanced fund, but these kinds of funds typically do not have to hold a specified percentage of any asset class. The portfolio manager is therefore given freedom to switch the ratio of stocks to bonds according to it's expectations of the market. Hybrid funds make investing easy and simple with instant diversification.
Next-->> How to
choose Mutual Funds
|
|
|
|
|
|
||
|
||
|
||
|
|
Home | Investing | Stocks | Bonds | Money Markets | Mutual Funds | Options | Futures | Real Estate | Retirement | Life Insurance | Credit Cards Search | Bookshelf | Financial Calculator | Glossary | Jokes & Quotes | Poker | Asthma | Mesquite, NV | E-Mail: webmaster@moneysitter.com
|
