Lecture 5 Types of Mutual Funds Financial Markets

Major types of mutual funds There are two major types of mutual funds – Money market mutual funds – Stock funds and bond and income funds Further mutual funds can classified on the basis of risk and return

Types of mutual funds 1. Money market funds – These funds invest in money market securities – They usually offer check writing features – They are low risk and low return funds – They provide the chance to earn the going rate in the money market with diversification advantage

2. Bond Funds – These fund specialize in fixed income sector – Within bond funds, there exists many categories – Funds may specialize in government bonds, or corporate bonds – Or they specialize in bonds of different maturities

3. Hybrid Funds Includes both bonds and equity funds They are also called balanced funds The main objective is to preserve capital and earn a return Have a bit higher risk than the bond funds because of investment in equity

4. Equity funds All investment is made in common stocks Within equity funds, there can be growth funds or income funds Growth funds have investment in stocks that have good growth potential (usually small firms) Income funds have investment in stocks that provide consistent flow of income(usually large firms)

5. Sector funds Some industries perform well in one stage of business cycle and others perform well in the other stages of business cycle An investment company may have a mutual fund that specialize only one in sector For example, a mutual fund may invest only in oil stocks

6. Index funds An index fund tries to match the performance of a broad market index The fund buys shares in securities in the proportion to the security’s representation in the index It is an unmanaged fund and hence a low cost Investors following passive strategy will invest in index fund

Mutual Funds returns Mutual funds returns are expressed in total returns i.e. dividends and capital gains as a percentage of initial investment A cumulative total return measures the actual performance over a stated period of time, 1 year, 3 years or 10 years For example, a fund gave returns: Past 1 yearPast 5 YearsPast 10 years -10% 8.5% 180.5%