Various Types of Mutual Funds and Its Uses

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Despite the popularity and presence of the market, it steadily has one of the many potential investment options to have great returns. The prime objective of the investment in marketplace is to let the investor meet his financial objective plans. People who tend to make profits during the inflation in economic value; the stock market is the best option to them.

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T ypes O f Mutual Funds

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What is Mutual Funds? Let's imagine you just overheard the following conversation among three friends: 'I had a great year last year. My mutual fund was up 10%.' 'Oh, yeah? Mine was up 12%.' 'Oh, my. Mine was down 1%.' If you have a mutual fund of your own, you might be able to jump right into the conversation. But if you don't have the slightest clue what these people are talking about, you're not alone. A  mutual fund  is a basket of various investments, such as stocks, bonds, and cash. A mutual fund is funded by the investments of individual investors and institutions.

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T ypes of Mutual F unds Money Market F unds Fixed Income Funds Equity Funds Balanced Funds Index Funds Specialty Funds Fund-of-Funds

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Money Market Funds These funds invest in short-term fixed income securities such as government bonds, treasury bills, bankers’ acceptances, commercial paper and certificates of deposit. They are generally a safer investment, but with a lower potential return then other types of mutual funds. Canadian money market funds try to keep their net asset value (NAV) stable at $10 per security.

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Fixed Income Funds These funds buy investments that pay a fixed rate of return like government bonds, investment-grade corporate bonds and high-yield corporate bonds. They aim to have money coming into the fund on a regular basis, mostly through interest that the fund earns. High-yield corporate bond funds are generally riskier than funds that hold government and investment-grade bonds.

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Equity Funds These funds invest in stocks. These funds aim to grow faster than money market or fixed income funds, so there is usually a higher risk that you could lose money. You can choose from different types of equity funds including those that specialize in growth stocks (which don’t usually pay dividends), income funds (which hold stocks that pay large dividends), value stocks, large-cap stocks, mid-cap stocks, small-cap stocks, or combinations of these.

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Balanced Funds These funds invest in a mix of equities and fixed income securities. They try to balance the aim of achieving higher returns against the risk of losing money. Most of these funds follow a formula to split money among the different types of investments. They tend to have more risk than fixed income funds, but less risk than pure equity funds. Aggressive funds hold more equities and fewer bonds, while conservative funds hold fewer equities relative to bonds.

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Index Funds These funds aim to track the performance of a specific index such as the S&P/TSX Composite Index. The value of the mutual fund will go up or down as the index goes up or down. Index funds typically have lower costs than actively managed mutual funds because the portfolio manager doesn’t have to do as much research or make as many investment decisions.

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Specialty Funds These funds focus on specialized mandates such as real estate, commodities or socially responsible investing. For example, a socially responsible fund may invest in companies that support environmental stewardship, human rights and diversity, and may avoid companies involved in alcohol, tobacco, gambling, weapons and the military.

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Fund-of-Funds These funds invest in other funds. Similar to balanced funds, they try to make asset allocation and diversification easier for the investor. The MER for fund-of-funds tend to be higher than stand-alone mutual funds.

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4 Common A pproaches T o I nvesting Top-down approach – looks at the big economic picture, and then finds industries or countries that look like they are going to do well. Then invest in specific companies within the chosen industry or country. Bottom-up approach – focuses on selecting specific companies that are doing well, no matter what the prospects are for their industry or the economy. A combination of top-down and bottom-up approaches – A portfolio manager managing a global portfolio can decide which countries to favour based on a top-down analysis but build the portfolio of stocks within each country based on a bottom-up analysis. Technical analysis – attempts to forecast the direction of investment prices by studying past market data.

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