3484657288_e908985f13Introduction to Mutual Funds – Types Of Bond Mutual Funds

In the previous article we had seen about stock (equity) mutual funds in detail. In this article, lets continue from there and explore the various types of bond mutual funds.

Bond mutual funds invest in a type of fixed income securities called bonds. Investing in bonds is generally considered less riskier than investing in stocks as they are less volatile and provide regular income in the form of interest payments. Hence bond mutual funds are quite popular among the risk averse investors. (Individuals who don’t like to take too much risk). Bond funds constituted about 25% of the total mutual fund assets in the US in 2011 (year end) thereby being the second most preferred type of mutual funds after equity mutual funds. [1]

In this article, lets see about the various types of bond mutual funds. Continuing with our previous tradition we will do so by asking a few questions.

Question 1

Does the bond fund invest in domestic bonds or does it invest in bonds of foreign companies?

Depending on which we have
1) Domestic bond mutual funds
2) Global/World bond mutual funds More »

218842717_1b67a87c8dIntroduction to Mutual Funds – Equity/Stock Mutual Funds

In the previous article we had broadly seen how to conceptually classify a mutual fund. One of the questions we asked while classifying a fund was the asset class in which it invests. Does it invest in stocks, bonds, money market instruments or does it diversify across more than one asset class? One of the most popular asset class in which mutual funds invest is stocks/equity.

In this article lets continue from where we left and see the types of equity/stock mutual funds in detail. Its interesting to note that a large proportion (around 48% in 2010) of mutual fund assets are invested in equities. Other asset classes like bonds, money market instruments constitute the rest (around 52% in 2010).

Why do a large proportion of mutual funds invest in stocks?

This is because equities have had a long history of outperforming almost every other asset class by giving the best returns over longer periods of time. There are some exceptions but its a good rule of thumb that investing in stocks is one of the best options for someone looking for long term investments. More »

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)? More »

2191130107_1781536f79Article Number 3 in the Mutual fund series (For the previous article click here)

In the previous article I had briefly pointed out some of the benefits that mutual funds have to offer. As a brief recap we had seen that mutual funds are beneficial because they are basically managed by professionals, some of them are well diversified and hence less risky, comparatively they cost lower and are convenient. Unlike hedge funds, they are quite transparent and well regulated. There is no shortage in the variety of mutual funds and suit pretty much any investors need. We had also seen that equity oriented funds are quite liquid and provide greater returns but at a greater risk. Finally we had seen the SIP as a wonderful way of investing for those who don’t or can’t invest at one go (lump-sum).

In this article lets see some of the disadvantages of mutual funds.

1) Losses are uninsured, Market risks are real

We had seen in the previous article that mutual funds are well regulated (by the SEC in USA and SEBI in India). However one must remember that they are not insured. Investing in stocks via mutual funds doesn’t provide you with any insurance against losses. If the funds NAV decreases, you lose money for real and there is no compensation or insurance.

However, we must realise its in the very nature of the markets to be uncertain and unpredictable (to an extent). Since we expect higher returns while investing in mutual funds (than say risk free treasury bonds) we must similarly expect a higher risk as well. Risk and reward are usually considered two sides of the same coin.

2) Over diversification? “Diworsification”

Diversification to an extent is good in that it reduces the overall risk of the portfolio but what happens when we do too much of it? It ends up substantially reducing the returns thereby defeating the purpose of investing in mutual funds. More »

6355318323_4c41d3ef76Introduction to Mutual Funds – Benefits of Mutual Funds

Article Number 2 in the Mutual fund series (For the previous article click here)

In the previous article I had given a brief introduction to mutual funds.  As a brief recap we had seen that mutual funds basically pool money from many investors and invest that money in shares, bonds, money market instruments, commodities like gold, among other things. In this article lets continue from there and see the various benefits that mutual funds have to offer. I will list the various benefits as points so that it would be easy for you to follow.


1) Professional Management

First and foremost, as I said in the previous article, mutual funds are managed by a professional money manager so you can basically find some comfort in knowing that whoever is managing your money is a professional and knows what he is doing. The manager does research with due diligence and only then makes a decision whether it be to buy/sell shares in a company or to invest in corporate bonds of a company or be it to invest in government bonds or to just sit tight in cash.


2) Diversification (Depends of the type of Mutual Fund)

Typically mutual funds don’t invest all their money into one stock or bond. They rather diversify by buying shares, bonds etc of various fundamentally strong companies. As a rule of thumb, More »

6829422155_d895bbb8d3Introduction to Mutual Funds.

Article Number 1 in the Mutual fund series (For the next article click here)

I am going to post a series of articles on mutual funds of which this would be the first. We will be going through the basics of what mutual funds are in this article and subsequently move on to their benefits & disadvantages, types, performance, expenses among other things in the later articles.

Prerequisite – It would be beneficial in our quest to understand mutual funds by first understanding about the concept of NAV which I have described here.

So lets begin,

What is a mutual fund?

SEC provides a very simple and jargon free definition for a mutual fund. It says that “A mutual fund is a type of investment company that pools money from many investors and invests the money in stocks, bonds, money-market instruments, other securities, or even cash.”

Lets understand what mutual funds are with the help of the following analogy. More »