Types of mutual funds

Investors can invest in stock funds, bond funds, money market funds, hybri d funds, and commodity funds. A money market fund is a mutual fund that sells shares of ownership in the fund and uses the proceeds  to invest in money market securities. Money market funds are the only funds that keep permanent share prices. Prices of these funds are mostly $1 per share, and the investment company keeps the NAV at $1 per share. Any expenses or short term losses from slae of securities are deducted from revenues generated from investments to keep the share price constant. This objective is more easily accomplished for funds that invest in money market securities which are short term, meaning not much fluctuation in the prices of the investment assets.

The money market funds provide current incomes and a safeguard of capital for investors. Many of these funds allow investors draw checks backed up by their accounts providing liquidity while investors withdraw their money in a constant $1 NAV per share.

Yields in money market funds tend to exceed the interest accounts in banks and savings and loans. The greatest difference between banking accounts and money market funds is that banking accounts has an insurance from the Federal Deposit Insurance Corporation (FDIC). In these last years, however, few money market funds have incurred in losses due to derivative securities investments that are directed to increase fund yields. When interest rates change direction unexpectedly many of these funds incur in great losses.

Before letting NAV drop below $1 per share the fund family silently cover losses of these money market funds to safeguard their reputation. The safest money market funds are those which only invest in US Treasury securities which are backed up by the Full Faith and Credit of the US government. Generally, all the money market funds are relatively safe because:

• Stocks they keep are issued by governments and their agencies, and by large corporations.
• Stocks have a short term maturity which reduces credit risks and negligence.

Large institutions are not probable to be negligent in issuing short term stocks and short term stock prices generally do not fluctuate that much. This does not mean that there are no high risk short term securities. Higher yielding, high risk short term securities do exist and some aggressive money market funds in them to raise yields. Read this fund prospectus that highlights investing restrictions over it. A stock fund is a mutual fund that specializes in stock investments. Stock funds vary depending on the type of stocks one chooses for his portfolios and guided by the investing objectives of the fund.

The Securities and Exchange Commission (SEC) needs Funds reveal their objectives. For example, a fund could have as objective to grow through largest capital profits. This type of fund would be possible if we looked for more aggressive investors that can stand the loss risk due to the speculative nature of funds in investing in stocks not yet mature form small companies.

More conservative equity funds have objectives oriented to provide current incomes and raise in capital. This kind of fund invests in dividend – paying funds which also provide capital appraisal although this is not the basic objective.

Growth and income funds look for a balance between providing current incomes and make profits from capital. Equity funds can also be classified according to the investment style, mainly growth stocks, value stocks or a blend of the two. Value stocks have different financial features from growth stocks.  

Value stocks generally pay dividends and have a low-price-to-earnings (P/E) ratios while growth stocks have high P/E ratios and companies tend to have high sales growth rates for specific periods.

Investing in equity funds do not immunize from market fluctuations. In a change in the markets direction the most speculative stocks in fund portfolios generally drop more than the more established Blue-Chip stocks. That is why share prices of aggressive funds are much more volatile than the share prices of the more conservative stock funds.