Types Of Funds Flashcards
Blend/Core funds
- stock funds with a portfolio comprised of a number of different classes of stock
- might include both blue-chip stocks and high-risk/high-potential return growth stocks
- use both growth and value management styles
- purpose is to allow investors to diversify their investment via management and securities in a single fund
Special situation funds
- buy securities of companies that may benefit from a change within the companies or in the economy
- takeover candidates and turnaround situations are common investments
- speculative (high-risk)
Example of a special situation fund
- investor believes banking industry is going to be going through a phase of M&As
- willing to take additional risk (to possibly profit from potential consolidation of the industry)
Specialized (sector) funds
- attempt to specialize in particular economic sectors or geographic areas
- must have minimum 25% of assets invested in their specialties
- offer high appreciation potential
- may pose higher risks to investors because of the concentration of investments
- speculative in nature
- include gold, technology, pharmaceutical, and biotechnology funds
- can also be geographical such as investing in companies located in the Pacific Basin or Silicon Valley
Example of specialized (sector) funds
- investor believes pharmaceutical industry will outperform the market over the next 5-10 years
- willing to speculate on the investment
Growth and income funds (combination funds)
- often diversify stock portfolio among companies showing long-term growth potential and companies paying high dividends-do this to attempt to combine objectives of growth and current yield
- often utilize both value and growth management styles
Example of growth and income fund (combination fund)
- investor seeking dividends and capital appreciation
- moderate risk
Option income funds
- invest in securities on which call options can be sold (known as covered calls)
- earn premium income from writing (selling) the options
- may also earn capital gains from trading options at a profit
- seek to increase total return by adding income generated by the options to appreciation on the securities held in the portfolio
(Equity) income funds
- stresses current income over growth
- objective may be accomplished by investing in stocks of companies with long histories of dividend payments-like utility company stocks, blue-chip stocks, and preferred stocks
- managed for value, not growth
Example of (equity) income funds
- investor willing to take low to moderate risk
- seeks income from equity investments in the form of dividends, with some capital appreciation
Value funds
- focus on companies whose stocks are currently undervalued-earnings potential is not reflected in stock prices
- undervalued companies expected to perform better than the reports indicate, providing opportunity to profit
- typically have dividend yields higher than growth stocks
- considered more conservative than funds managed for growth
Example of value funds
-investor willing to take moderate risk when investing to purchase a vacation home in 7-10 years
Aggressive growth funds
- sometimes called “performance funds”
- willing to take greater risk to maximize capital appreciation
- some invest in newer companies with relatively small capitalization (less than $2 billion capitalization) referred to as small-cap funds
- mid-cap funds-somewhat less aggressive and have their portfolio shares of companies with market cap of $2 billion - $10 billion
- large-cap funds-market cap greater than $10 billion; can be more stable and less volatile in a turbulent market;lower market cap=greater volatility
Example of aggressive growth fund (focusing on small- or mid- cap companies)
- investor seeking high-potential returns
- understand there can also be significant losses
- willing to invest for 10-15 years
Growth/Value funds
-invest in stocks of companies whose businesses are growing rapidly
-tend to reinvest all or most of their profits for research and development rather than pay dividends
-focused on generating capital gains rather than income
-managers may consider stocks that many feel are overvalued because there may still be upside potential
-tend to have elevated levels of risk
-blue-chip or conservative growth funds-invest in established and more recognized companies to achieve growth with less risk
•generally own shares of companies with fairly large market cap
Example of growth/value fund
- investor willing to take moderate risk
- willing to invest for 5-7 years minimum
- may be interested in a blue-chip or large-cap growth fund
Stock funds
- mutual funds that use stock to meet its stated objectives
- common stock normally found in portfolio of any mutual fund whose primary/secondary objective is growth
- equity funds have historically outpaced inflation over most 10-year horizons
Index funds
- invest in securities that mirror a market index like the S&P 500
- buys and sells securities in a manner that mirrors the composition of the selected index
- index may be broad like the S&P 500 or narrow like a transportation index
- fund’s performance should closely track the underlying index performance
- turnover of securities is minimal since the only trades that take place are triggered by a change in the index (one company replaced by another)
- so generally has lower management costs than other types of funds
Example of index fund
- investor does not believe in paying for professional stock selection of a managed fund
- belief is that it’s too difficult to outperform the market as a whole (or in part)
Foreign stock funds/international funds
- invest only in the securities of foreign countries (companies that have their principal business activities outside of the U.S.
- primary objective is long-term capital appreciation
- some funds also seek current income
Global funds/worldwide funds
-invest in the securities of both the US and foreign countries
-when portfolio has large percentage of foreign securities currency risk and political risk become more important
•elevated when investing in frontier funds, which invest in pre-emerging economies, since accounting and regulatory schemes are usually much less vigorous than in the US
-often purchased to diversity one’s portfolio
-may be suggested with disclosure that the foreign and international funds provide greater diversification, but have more risk than the global and worldwide funds
Example of global funds/worldwide funds
- investor has a solid mix of securities all based in US
- conveyed that taking more risk and diversifying portfolio at same time is desired
