Types of mutual funds comprehensively
When grouping mutual funds, you have seen that the asset manager can invest in a lot of directions. Therefore, in this entry we will take over the types of mutual funds.
You can choose from the directions described in the investment fund’s description, so if the fund’s creator had decided to, they are free to vary any asset with any asset for a particular purpose, nothing is carved in stone.
If the fund’s creator chooses a purely one direction, they will most often choose the following:
- money market fund
- bond fund
- equity fund
- real estate fund
- in addition to actively managed funds, there are index tracking funds, the vast majority of which are based on securities.
But if you want to expand or vary them, you can choose from the following:
- absolute return funds
- funds of funds, ie funds investing in other investment funds
- commodity market funds
- hedge fund
- derivatives funds
- mixed funds
Let’s look at these now.
These are characterized by the same features that you may have already learned from the summary of mutual funds. Because they operate in the same market and fund managers are equally required to operate, they share much of the risk. That is why we are only looking at the differences now.
Absolute return funds
This type of mutual fund does not favor an explicit asset class. In terms of the composition of the fund, the fund manager has a relatively large margin of maneuver. The only expectation is for the fund to outperform risk-free returns in a given market environment. Of course, this does not mean that it has the same risk as the risk-free assets. You can also read on the Silver Moon page about the risks of investing in absolute return funds.
They can choose from a lot of directions to achieve this, they may even get a full free hand. This way, they can choose the most risky ways at their own discretion. Accordingly, it is extremely important that you take the investment period proposed by the fund manager seriously. In the short term, the exchange rate of the fund may fluctuate significantly (volatility).
Fund of funds
These funds are expected to invest most of the money in them in other mutual funds. With this method, diversification is achieved to the maximum. After all, the fund of funds also chooses from many mutual funds, and the selected mutual funds also invest in hundreds or even thousands of companies or assets.
The return of a fund that invests in other mutual funds depends to a large extent on the type of investments that the investment fund you choose prefers. Accordingly, its level of risk and recommended time horizon also show a large variance.
While diversification provides security, there is one very important factor you should be aware of.
When you buy an investment fund of funds, you pay the fund management fee in the same way as in any other case. When this mutual fund buys units from other mutual funds, they also pay their fund management fee. In other words, you pay double in one step. This is why you can also read sometimes that you are better to avoid.
Take a look at the picture below and you can see that nice results can be achieved with them if you choose with due care.
A double-paid fund management fee is considered by many to be a disadvantage because it can increase costs. I’d rather say pay attention to it. After all, this type of mutual fund can open the door for you to places where you couldn’t even direct money with your best intentions on your own. Not to mention that if they buy an ETF unit, its cost can be quite friendly.
Commodity market funds
Choose from products available on commodity exchanges. That is, they can invest from agricultural crops (coffee, wheat, soybeans, etc.) through raw materials (oil, industrial metals, gases) to precious metals (gold, silver).
In commodity market funds, the fund does not own the product, it only uses their exchange rate movements through financial products.
Due to its high entry costs, it is really only available for a closed circle, because this fund is subject to loosen regulation. In many places, they mix with absolute return funds, but from that they engage in a wider range of activities. In a very nutshell, it can be said that wherever and wherever they invest, the goal is to achieve a return. This is the goal and expectation always, even when everything else falls.
If you don’t have roughly $ 1 million in an amount for this purpose, you can’t invest directly in a hedge fund due to the high entry limit. You can do this through other mutual funds.
This investment fund may also contain derivative products. That is, they do not own the product on which the price is based, but link their own price to it, that is, he derives it from it.
These can be options, futures, but you can even find them with leverage. Due to leverage, their risk is higher compared to traditional funds, but this is why their return prospects can be higher.
As you can see in the picture, it was under 5 years who doubled or tripled his money.
Mutual funds provide both the opportunity to access high-yield but riskier assets (equities or units of other high-risk funds) and, at the same time, more predictable bonds or other money market instruments.
The fund manager is given more freedom to invest in these funds, but not as much as in absolute returns due to maintaining ratios. Depending on how much the risky part can account for, we can talk about a prudential, balanced and dynamic mixed fund.
A mixed fund with a prudential portfolio
Equities or other riskier investments may account for up to one-third of these mutual fund called prudential or bond overweighted funds. The remaining two-thirds are partly invested in lower-risk assets similar to bond funds.
Their recommended investment period is 1-3 years, and you can expect a similar return in terms of their return prospects:
Balanced mixed fund
In a balanced mixed fund, they may already have a ratio higher than one-third but lower than two-thirds. In short, roughly half can be accounted for by equities and the other half by bonds.
Their recommended term is usually 3-5 years. Their yield prospects are shown in the picture below.
Dynamic mixed fund
Dynamic, also known as equity-weighted mixed funds, have at least two-thirds riskier assets.
Due to their high equity exposure, their recommended holding period is 5-7 years, similar to equity funds, and their return prospects are similar, but with less volatility.
Types of mutual funds: Summary
Everyone can choose from mutual funds according to their own tastes, investment goals and options. The fact that one asset bears an absolute return name may even belong to another grouping. Thus, these designations show the a given property of mutual funds.
When chosen appropriately for your own level of risk, you can also achieve outstanding returns with them. However, compiling the right portfolio requires expertise. We can help you with this, contact us.
- Which asset base would you like to hear more about?
- What groupings do you prefer when choosing an investment or an investment fund within it?
- If you choose from several mutual funds, how would you divide your investment?