Last week I blogged about the basics of Mutual Funds, including what MFs are, advantages and disadvantages of investing in Mutual Funds. Now that we got the basics out of the way, I want to break it down a little further and get into the different types of Mutual Funds.
If you’ve ever talked to anyone regarding Mutual Funds, you will realize that there are many different types of MFs, over 1200 to be exact, yet everyone different in it’s own unique way. With so many different options to choose from, it can get pretty confusing and scare the average investor off, by them opting for more suttle, yet simple investment options such as GICs and Savaings Bonds.
Despite there being over 1200 Mutual Fund investment options, they all fall into the one of the categories below;
This fund invests in common stock, preferred shares, bonds and cash. Since this is a mixed portfolio, typically Balanced Funds provide a combination between growth investing and income. This type of fund is most suitable for someone with limited funds to invest and that they still can access a mixed portfolio, combined in one fund.
Fixed Income Funds
This type of fund is a combination of mortgages, bonds, debentures and treasury bills. Fixed Income Fund aims at providing a steady income (fixed income) with some capital gains.
This type of fund invests in common and preferred shares of various Canadian companies. Equity Funds are geared towards long-term investors (5+ years) seeking growth through Capital Gains.
Special Equity Funds
One of the most volatile funds. The returns can be dramatic, both gains and losses. Most experienced investors have only a small percentage of their investments in Special Equity Funds. Reason being they call this fund “Special”, is because it only invests in precious metals, Real Estate & resources, hence why the fund is not for the faint of heart.
Money Market & Treasury Bills Funds
Considered the most conservative of all funds. It invests in government securities and other (very safe) securities. Since this type of fund being the safest, it only pays a small return, typically 2-3 percent higher than the average savings account from a top five bank.
These types of funds invests in dividend paying preferred shares of Canadian corporations and common shares, which hope to yield a high level of dividend income. Dividend funds also receive preferential tax treatment (tax advantage). Like other funds, there is a potential for long-term capital growth.
Global & International Funds
These funds invest in money market securities, bond and stock markets of various countries around the world. By investing in Global & International Funds, you the investor, is giving your self extra diversification and the opportunity to yield higher returns.
When choosing on where to invest your hard earned money and into which type of Mutual Fund, do your research right, discovery the type of investor you are (conservative, moderade or agressive), discover the particular fund’s Investment Objective & Fund’s Level of Risk.
Always keep in mind that all investments are associated with some form of risk. The higher the risk, the higher the potential of return and the lower the risk, the lower your potential of return. No single investment is risk free. There are many different types of risk to consider, here are some;
Market Risk - A risk of the price of your unit or investment decreasing.
Credit Risk - Possibility that the company holding your money will not pay the interest or dividend due or principal amount at maturity.
Inflation Risk - Risk that the dollar will be lower, when you sell, than when you bought your investment.
Interest Rate Risk - If the interest rates rise, it can affect your investment. Bonds are a good example.
In conclusion, do your research thoroughly on the type of Mutual Fund you’re looking to invest into. Match the fund’s objectives, with your own objectives. Are you both looking into long-term or short-term gains? or is it a mixed objective of growth and income? Whatever the objective, make sure it’s right for you.