Index Funds and Stock Portfolios

An index fund is a mutual fund that includes a stock portfolio designed to make the same market performance as a whole. An index fund tracks an underlying market index and searches to equal returns of that market index in particular. For example, the S&P 500 Index funds invest in stocks of the S&P 500 Index.

This strategy does not need an active management of assets in the fund until they are left out of the index. Only then changes will be made in the fund. Enthusiasm by index funds has made other areas as Mid cap and small cap stocks, emerging markets, Europe, Asia and the Pacific Rim grow.

A combination of stocks and bonds is denominated as a balance fund. Balance funds invest in a combination of stocks and bonds. The fair portion of the fund looks to provide growth of capital and fixed income investments provide stockholders with cash.

The percentage range allocated in stocks and bonds is explained in the fund prospectus. A bond fund invests in a stock portfolio with fixed incomes. Bond funds vary among themselves if due to considerably many different kinds of existing bonds such as corporate bonds, Treasury bonds, agency bonds, junk bonds, municipal bonds, zero-coupon bonds and foreign bonds.

Many people think that by investing in bond funds your main investment is safe because bonds are a more conservative investment than investing in stocks, but this is not always the case. You can lose money in bond funds as well as in stock funds.

When interest rates in market are high the existing prices of bonds drop to make yields competitive to new issues and make funds prices drop. The type of stocks in which funds invest determine the type of risks that the fund assumes: reaction to changes in the market interest rates, the credit quality and risk for negligence in addition to the time maturity lasts and fund yields.

Prices of shares in bond funds fluctuate depending of the fund asset values (investments). Some type of stocks fluctuate more in their prices than other values do. For example, GNMA (Ginnie Mae) securities are more volatile to changes which are produced by interest rates than the treasury notes and bonds with comparative maturity. To measure the extent of volatility in mutual funds prices you should understand how different are the reactions to varied types of bonds to changes in interest rates.

Municipal bond funds provide shareholders with a free of tax interest payment at a federal level although incomes could be subject to state and local taxes. The conservative investor should be aware of bond funds made of junk bonds (a high-yield bond fund) can fluctuate as much as 50% in NAV prices.

Generally while the riskier stocks that the funds keep are greater potential for return as well as greater potential loss. This is true for all types of funds even stock funds.

Much has been written about hedge funds since the disaster occurred in the long term capital management, a Connecticut hedge fund that had to be rescued by 14 financial institutions. Long term capital management was subject of great losses in its position of Russian bonds because of adverse fluctuations in prices in currency markets. Moreover, in 2001 Dow Jones total market index of US stocks dropped 12% while hedge funds earned 4.4% according to CSFB / Tremont Index.