Which Types of Funds Are You Investing?
Novermber 12, 2012
There are so many words that end with “funds”. Here, we are examining most common funds that are discussed in the news or other media sources.
One of the most commonly heard funds is Mutual Funds. In mutual funds, a pool of investment capital acts as the main vehicle. Each investor of a mutual fund has his/her portion of ownership in the portfolio, just as equity represents an ownership of company. Mutual funds can be roughly divided into three types: Money market fund, Bond mutual fund, and stock mutual funds.
Money Market Funds – invest in short-term debt securities and yield interest income with low volatility of changes in share value. Money market funds are further differentiated by the types of money market securities and their average maturities.
Bond Mutual Funds – invest in fixed-income securities. There are a variety of bond mutual funds depending on maturities, credit ratings, issuers, and types. Some examples of bond mutual funds are government bond funds, tax-exempt bond funds and high-yield bond funds.
Stock Mutual Funds - are typically categorized into either index funds or actively managed funds. Index funds are constructed to replicate the performance of a particular index such as S&P 500. On the other hand, actively managed funds are composed of investment items hand-picked by the investment management to outperform the indices.
Exchange-traded funds – are also similar to closed-end mutual funds in purchasing and selling of the fund. However the difference lies in how the funds are managed. ETFs are mostly managed to match a particular index.
The next type of investment, hedge funds bear much more risk as it is not regulated as much as other funds. Hedge funds limit the number of investors who can invest in the funds and also are sold only to qualified investors with minimum amount of investment, often ranges between $250,000 and $1 million. Hedge funds employ many different strategies such as
Long-short funds – buy securities that are expected to appreciate while shoring securities that are expected to underperform the overall market
Fixed-income arbitrage funds – takes a long and short positions in debt securities. The funds earn from mispricing while minimizing the effects of interest rate changes on portfolio values
Global Macro – speculate on changes in international interest rates and currency exchange rates. Often, managers use derivative securities and a huge amount of leverage.
Other alternative investment funds include Buyout funds and Venture capital funds. Buyout funds buy entire public companies and privatize them often to restructure capital structure. The profit is generated when the restructured firm is sold in a public offering or to another company. Venture capital is similar to Buyout funds but they invest in start-up companies to grow them for an IPO or Merger and Acquisition.
Original post can be found here!
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