Candlestick Trading Blog
February 5, 2008
Investment Funds
Types of Investment Funds There are many different ways to invest your hard-earned money. Today’s article includes a description of various types of investment funds including mutual funds, index funds, bond funds, stock funds, and hedge funds. Mutual Funds Mutual funds allow a group of investors to pool their money together with a predetermined investment objective. When investing in mutual funds, you are buying shares of the mutual fund and you become a shareholder of the fund. The advantage of a mutual fund is that investors can purchase stock and bonds with much lower trading costs than if they tried to purchase them individually. These investment funds typically have a fund manager who is responsible for investing the pooled money into specific securities. Mutual funds allow you to make money three different ways. Income is generated in the form of a distribution from dividends on stocks and interest on bonds. These investment funds also have capital gain if they sell securities that have increased in price, also distributed to investors. Lastly, if the funds holdings increase in price but are not sold by the fund manager, the fund’s shares increase in price allowing investors to then sell mutual funds shares for a profit. The most important advantage to mutual fund investing is that it leads to great portfolio diversification. Index Funds Index funds are mutual funds that attempt to copy the performance of a stock market index. These investment funds are perfect for the buy and hold investor with an expense ratio of about 0.18%. The reason for this is that index funds delay the capital gains because they hold onto stock much longer and trade stock less often. This means that the money that would have been paid out in taxes actually keeps producing investment returns. These investment funds also have lower fees because of the same reason in that they are less actively managed and can be managed by a much smaller staff. Bond Funds In order to understand these types of investment funds, you must first understand what bonds are. They are simply put, a loan in the form of a security. They are promises to buy back the original amount (principal) plus interest and are considered less risky than stocks. A bond fund is a mutual fund that invests primarily in bonds or other debt securities. The borrower is typically the government or corporations in order to raise money from the public. Types of bond funds for bond investing include Stock Funds When investing in stock there are many different types of investment funds. There are value funds which are stocks that have a low price to earning ratio meaning they have earning power or that they have value in their underlying assets. They are basically cheap stocks that have great potential. Another type of stock fund is a growth fund. There are many different types of growth funds, but basically if you are seeking high long-term returns and can tolerate the normal ups and downs of the stock market then this is for you. When looking at long term investing, growth funds should be the core holding around which an investor’s strong portfolio is built. Other types of investment funds in this category include growth and income, equity-income and balanced funds. Hedge Funds These types of investment funds are often used when the stock market is doing poorly. They are often mistaken for mutual funds even though they are not. Hedge fund investing is private and is therefore not regulated. It is a private pool of investment capital organized into a limited partnership to invest in a portfolio made up of a variety of securities. There are limited partners (499) that can invest in any one hedge fund and there must be an accredited investor with a net worth of about one million. The liquidity varies from monthly to annually and most hedge fund investment strategies try to hedge against downturn in the markets. There are many ways that successful traders choose to practice money management and to participate in trading and investing. The above is only a quick snapshot of the many different investment funds available to investors. Online Stock Market Reviews presented live via the internet by Stephen Bigalow |
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