5705329601_c6ce8c051aIntroduction to Mutual Funds – Types of mutual funds

Article number 4 in the mutual fund series (For the previous article – Disadvantages of mutual funds)

Classifying mutual funds is always a nightmare. There are tens of thousands of mutual funds out there and trying to classify them into a fund type would be very difficult. However broadly and conceptually we can classify any mutual fund by asking ourselves the following five questions

Question 1 – Does the mutual fund invest exclusively in one asset class (like stocks only fund, bonds only fund, money market instruments only fund, Gold/commodity only fund?) or does it diversify across asset classes (say 60% stocks, 20% bonds, 10% gold, 10% money market funds or something like that)?

Depending on which we have
1) Equity/Stocks mutual funds (Note that real estate mutual funds are also a type of equity fund)
2) Bond mutual funds
3) Money market mutual funds
4) Commodity mutual funds
5) Hybrid mutual funds (A combination of two or more of the above)

Question 2 – Does the fund manager actively manage the portfolio or is he just passively trying to track the index?

Depending on which we have
1) Actively managed mutual funds
2) Passively managed mutual funds

Question 3 – Am I investing my money at one go into the mutual fund or at regular intervals (Say, once a month)?

Depending on which we have
1) Lump Sum (investing at one go rather than spreading investments over a period of time)
2) SIP (Systematic investment plan)
One must note that lump-sum & SIP investments are not types of mutual funds but rather methods of investing in mutual funds.

Question 4 – Is the fund focused on giving me regular dividends or does it reinvest the dividends for me or are my profits based on the appreciation of the funds NAV (growth)?

Depending on which we have
1) Growth funds
2) Dividend payout funds
3) Dividend reinvestment funds

Question 5 – Once I invest in a mutual fund do I exit by selling shares of the fund to other investors on the stock exchange (close ended mutual fund) or do I sell them to the mutual fund itself (open ended mutual fund)?

We have
1) Open ended fund
2) Close ended fund

* More on open ended and close ended mutual funds in the next article.

* Note that I have not included exchange traded funds (ETFs) and unit investment trusts (UITs) here as they are generally considered different from traditional mutual funds. We will be dealing with them in subsequent articles.

These are the five questions you need to ask if you would like to classify the mutual fund in which you are interested in. Now that we know what questions to ask, it becomes pretty easy to understand under which category a given mutual fund comes under.

For someone living in the US for example, lets consider PTTRX, one of the the largest mutual fund in the US.

1) It can be classified as a (intermediate term) bond mutual fund as it has 103% of its assets in bonds and around 4% in others like equities. 103% of bond holdings basically means its a bit leveraged. [1]
2) The fund is actively managed currently by William H. Gross.
3) It doesn’t require any SIP but does require a minimum initial investment of $1,000,000 which you can invest at one go.
4) It is an open-ended mutual fund.[2]

As for someone living in India, Lets consider for example, the HDFC Top 200 Fund.

1) It can be classified as a equity mutual fund. (It can invest upto 100% of its portfolio in equities) [3]
2) It is passively managed (with a turnover ratio of around 30%). [4]
3) It has both SIP and lump-sum investment options.
4) There are both growth and dividend plans available.
5) It is an open-ended mutual fund.

With this introduction, we will be in a position to take an in-depth look at the types of stock and bond mutual funds in the next article.

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I go by my online nick Sengukoi. I have various interests of which finance, economics and the markets are some of the ones at the top of the list. Connect with Sengukoi on Google+

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5 Comments

  1. Just stumbled upon your blog and wanted to say that i have really enjoyed reading your blog posts. Any way i’ll be subscribing to your feed and i hope you post again soon.

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  2. Very well written and crisp introduction to mutual funds. Looking forward to your other blogs… Avin

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  3. Aw, this was a very nice post. In concept I want to put in writing like this additionally – taking time and precise effort to make a very good article, however what can I say… I procrastinate alot and by no means appear to get one thing done.

    Reply

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