Mutual Funds: Hedge and Exchanged-Traded Funds

There are numerous kinds of mutual funds that allow investors to receive a secure rate of return with minimal risk.  While the funds have various amounts of risk, it still behooves investors to research each kind of fund and be fully cognizant of the investment they are making.

Open-End Mutual Fund
An open-ended mutual fund issues new shares to investors and buy back shares when investors wish to sell.  These funds do not have restrictions on the amount of shares the fund will issue.  If demand is high enough, the fund will continue to issue shares no matter how many investors there are.  In such funds, when the investment manager determines the total assets are too large to execute its stated objective, the fund will be closed to new investors.  In some extreme cases, it may be closed to new investment by existing fund investors.

Closed Mutual Fund
As referred to above, closed funds are closed either temporarily or permanently to new investors after an investment manager is concerned the asset base is too large to execute his investing style.  Shareholders in a closed mutual fund are allowed to continue investing in that fund, yet they are often precluding from other investments.

These funds differ from closed-end funds.  Despite the similar name, the latter is structured and listed as a stock on a stock exchange.  Closed-end funds have a fixed number of shares and generally invest in technical or other specialized sectors.

Equity Funds
Equity funds are the most common kind of mutual fund; in fact, they hold 50% of all mutual fund investments in the United States.  Equity funds tend to invest in equity as opposed to investments in stock and bond funds.

Bond Funds
Accounting for 18% of mutual fund assets, bond funds presently include term funds, municipal bonds, and high -yield bonds.  Term bond funds have a fixed set of time prior to maturity.  Municipal bond funds have numerous tax advantages and lower risk but at the expense of having lower rates.  High-yield bonds tend to invest in corporate bonds and while there is much potential for a large return, there is also significant risk.

There is presently a misconception that bond funds have little to no risk.  However, this is a falsehood as bond funds are subject to numerous risks i.e. prepayment risks, interest risks, and credit risks.  An investor is responsible for reading all of the fund’s information, and the information can be retrieved from the prospectus, which discloses most risks.

Money Market Funds
Holding 26% mutual fund assets in the United States, Money market funds are a conservative approach to investing with mutual funds.  They receive some of the lower rates of return, though entail the least amount of risk as well.  These funds pay dividends that generally reflect short-term interest rates.  Such typically invest in certificates of deposit, commercial paper of companies, government securities, or other highly liquid securities.  Despite the low amount of risk, it is still important that an investor reads all of the fund’s available information, including its prospectus and most recent shareholder report.

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