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Types of mutual funds
Most funds have a particular strategy they focus on when investing. For instance, some
invest only in Blue Chip companies that are more established and are relatively low risk.
On the other hand, some focus on high-risk start up companies that have the potential for
double and triple digit growth. Finding a mutual fund that fits your investment criteria
and style is important.

Types of mutual funds are:

Value stocks
Stocks from firms with relative low Price to Earning (P/E) Ratio, usually pay
good dividends. The investor is looking for income rather than capital gains.
Growth stock
Stocks from firms with higher low Price to Earning (P/E) Ratio, usually pay small
dividends. The investor is looking for capital gains rather than income.
Based on company size, large, mid, and small cap
Stocks from firms with various asset levels such as over $2 Billion for large; in
between $2 and $1 Billion for mid and below $1 Billion for small.
Income stock
The investor is looking for income which usually come from dividends or interest.
These stocks are from firms which pay relative high dividends. This fund may
include bonds which pay high dividends. This fund is much like the value stock
fund, but accepts a little more risk and is not limited to stocks.
Index funds
The securities in this fund are the same as in an Index fund such as the Dow Jones
Average or Standard and Poor's. The number and ratios or securities are
maintained by the fund manager to mimic the Index fund it is following.
Enhanced index
This is an index fund which has been modified by either adding value or reducing
volatility through selective stock-picking.
Stock market sector
The securities in this fund are chosen from a particular marked sector such as
Aerospace, retail, utilities, etc.
Defensive stock
The securities in this fund are chosen from a stock which usually is not impacted
by economic down turns.
International
Stocks from international firms.
Real estate
Stocks from firms involved in real estate such as builder, supplier, architects and
engineers, financial lenders, etc.
Socially responsible
This fund would invests according to non-economic guidelines. Funds may make
investments based on such issues as environmental responsibility, human rights,
or religious views. For example, socially responsible funds may take a proactive
stance by selectively investing in environmentally-friendly companies or firms
with good employee relations. Therefore the fund would avoid securities from
firms who profit from alcohol, tobacco, gambling, pornography etc.
Balanced funds
The investor may wish to balance his risk between various sectors such as asset
size, income or growth. Therefore the fund is a balance between various attributes
desired.
Tax efficient
Aims to minimize tax bills, such as keeping turnover levels low or shying away
from companies that provide dividends, which are regular payouts in cash or
stock that are taxable in the year that they are received. These funds still shoot for
solid returns; they just want less of them showing up on the tax returns.
Convertible
Bonds or Preferred stock which may be converted into common stock.
Junk bond
Bonds which pay higher that market interest, but carry higher risk for failure and
are rated below AAA.
Mutual funds of mutual funds
This funds that specializes in buying shares in other mutual funds rather than
individual securities.
Closed end
This fund has a fixed number of shares. The value of the shares fluctuates with the
market, but fund manager has less influence because the price of the underlining
owned securities has greater influence.
Exchange traded funds (ETFs)
Baskets of securities (stocks or bonds) that track highly recognized indexes.
Similar to mutual funds, except that they trade the same way that a stock trades,
on a stock exchange.
InvestorWords.com

mutual fund

Definition
An open-ended fund operated by an investment company which raises money from
shareholders and invests in a group of assets, in accordance with a stated set of
objectives. mutual funds raise money by selling shares of the fund to the public, much
like any other type of company can sell stock in itself to the public. Mutual funds then
take the money they receive from the sale of their shares (along with any money made
from previous investments) and use it to purchase various investment vehicles, such as
stocks, bonds and money market instruments. In return for the money they give to the
fund when purchasing shares, shareholders receive an equity position in the fund and, in
effect, in each of its underlying securities. For most mutual funds, shareholders are free to
sell their shares at any time, although the price of a share in a mutual fund will fluctuate
daily, depending upon the performance of the securities held by the fund. Benefits of
mutual funds include diversification and professional money management. Mutual funds
offer choice, liquidity, and convenience, but charge fees and often require a minimum
investment. A closed-end fund is often incorrectly referred to as a mutual fund, but is
actually an investment trust. There are many types of mutual funds, including aggressive
growth fund, asset allocation fund, balanced fund, blend fund, bond fund, capital
appreciation fund, clone fund, closed fund, crossover fund, equity fund, fund of funds,
global fund, growth fund, growth and income fund, hedge fund, income fund, index fund,
international fund, money market fund, municipal bond fund, prime rate fund, regional
fund, sector fund, specialty fund, stock fund, and tax-free bond fund.

Mutual Fund Definition : or What is a Mutual Funds and How does these work?

Mutual Fund Definition: A mutual fund is made up of money that is pooled together by a large
number of investors who give their money to a fund manager to invest in a large portfolio of
stocks and / or bonds

Mutual fund is a kind of trust that manages the pool of money collected from various
investors and it is managed by a team of professional fund managers (usually called an
Asset Management Company) for a small fee. The investments by the Mutual Funds
are made in equities, bonds, debentures, call money etc., depending on the terms of each
scheme floated by the Fund. The current value of such investments is now a days is
calculated almost on daily basis and the same is reflected in the Net Asset Value (NAV)
declared by the funds from time to time. This NAV keeps on changing with the changes
in the equity and bond market. Therefore, the investments in Mutual Funds is not risk
free, but a good managed Fund can give you regular and higher returns than when you
can get from fixed deposits of a bank etc.

Why Should I Invest in a Mutual Fund when I can Invest Directly in the Same
Instruments :

We have already mentioned that like all other investments in equities and debts, the
investments in Mutual funds also carry risk. However, investments through Mutual
Funds is considered better due to the following reasons :-

• Your investments will be managed by professional finance managers who are in a

better position to assess the risk profile of the investments;
• Your small investment cannot be spread into equity shares of various good
companies due to high price of such shares. Mutual Funds are in a much better
position to effectively spread your investments across various sectors and among
 several products available in the market. This is called risk diversification and
can effectively shield the steep slide in the value of your investments.

Thus, we can say that Mutual funds are better options for investments as they offer regular
investors a chance to diversify their portfolios, which is something they may not be able to do if
they decide to make direct investments in stock market or bond market. For example, if you
want to build a diversified portfolio of 20 scrips, you would probably need Rs 2,00,000 to get
started (assuming that you make minumum investment of Rs 10000 per scrip). However, you
can invest in some of the diversified Mutual Fund schemes for an low as Rs.10,000/-.

WHAT ARE VARIOUS TYPES OF MUTUAL FUNDS

A common man is so much confused about the various kinds of Mutual Funds that he is
afraid of investing in these funds as he can not differentiate between various types of
Mutual Funds with fancy names. Mutual Funds can be classified into various categories
under the following heads:-

(A) ACCORDING TO TYPE OF INVESTMENTS :- While launching a new scheme,

every Mutual Fund is supposed to declare in the prospectus the kind of instruments in
which it will make investments of the funds collected under that scheme. Thus, the
various kinds of Mutual Fund schemes as categoried according to the type of investments
are as follows :-

(a) EQUITY FUNDS / SCHEMES

(b) DEBT FUNDS / SCHEMES (also called Income Funds)

(c ) DIVERSIFIED FUNDS / SCHEMES (Also called Balanced Funds)

(d) GILT FUNDS / SCHEMES

(e) MONEY MARKET FUNDS / SCHEMES

(f) SECTOR SPECIFIC FUNDS

(g) INDEX FUNDS

B) ACCORDING TO THE TIME OF CLOSURE OF THE SCHEME :- While launching

a new schemes, Mutual Funds also declare whether this will be an open ended scheme
(i.e. there is no specific date when the scheme will be closed) or there is a closing date
when finally the scheme will be wind up. Thus, according to the time of closure schemes
are classified as follows :-

(a) OPEN ENDED SCHEMES

 (b) CLOSE ENDED SCHEMES

C) ACCORDING TO TAX INCENTIVE SCHEMES :- Mutual Funds are also allowed to

float some tax saving schemes. Therefore, sometimes the schemes are classified
according to this also:-

(a) TAX SAVING FUNDS

(b) NOT TAX SAVING FUNDS / OTHER FUNDS

(D) ACCORDING TO THE TIME OF PAYOUT :- Sometimes Mutual Fund schemes are
classified according to the periodicity of the pay outs (i.e. dividend etc.). The categories
are as follows :-

(a) Dividend Paying Schemes

(b) Reinvestment Schemes

The mutual fund schemes come with various combinations of the above categories.
Therefore, we can have an Equity Fund which is open ended and is dividend paying
plan. Before you invest, you must find out what kind of the scheme you are being asked
to invest. You should choose a scheme as per your risk capacity and the regularity at
which you wish to have the dividends from such schemes.

Various Types of Mutual Funds based on allocation of funds : These days asset
managers give very attractive names to some of their schemes, which may just another
type of the above referred schemes. Some of the most popular type of Mutual Funds
these days are "Aggressive Growth Fund"; "Balanced Fund"; "Blend Fund"; "Capital
Appreciation Fund"; "Crossover fund"; "Global Fund"; "Growth and Income Fund";
Money Market Fund"; "Liquid Fund"; "Prime Rate Fund"; "Hedge Fund"; "Index Fund";
"International Fund".

Association of Mutual Funds in India : It is popularly known as AMFI

(www.amfindia.com). The site provides valuable information about mutual fund industry
in India. For getting the details of the latest NAVs of various Mutual Fund schemes in
India, you can click on link provided at the top.

SOME OF THE TERMS USED IN MUTUAL FUNDS

Net Asset Value (NAV)

Net Asset Value is the market value of the assets of the scheme minus its liabilities.
The per unit NAV is the net asset value of the scheme divided by the number of units
outstanding on the Valuation Date.
Sale Price : It is the price you pay when you invest in a scheme and is also called
"Offer Price". It may include a sales load.

Repurchase Price : - It is the price at which a Mutual Funds repurchases its units
and it may include a back-end load. This is also called Bid Price.

Redemption Price : It is the price at which open-ended schemes repurchase their

units and close-ended schemes redeem their units on maturity. Such prices are NAV
related.

Sales Load / Front End Load : It is a charge collected by a scheme when it sells
the units. Also called, ‘Front-end’ load. Schemes which do not charge a load at the
time of entry are called ‘No Load’ schemes.

Repurchase / ‘Back-end’ Load :

It is a charge collected by a Mufual Funds when it buys back / Repurchases the units
from the unit holders.

History of mutual funds

The modern mutual fund was first introduced in Belgium in 1822. This form of investment soon spread to
Great Britain and France. Mutual funds became popular in the United States in the 1920s and continue to be
popular since the 1930s, especially open-end mutual funds. Mutual funds experienced a period of
tremendous growth after World War II, especially in the 1980s and 1990s.
The origin of mutual fund industry in India is with the introduction of the concept of mutual
fund by UTI in the year 1963. Though the growth was slow, but it accelerated from the year
1987 when non-UTI players entered the industry.

In the past decade, Indian mutual fund industry had seen a dramatic imporvements, both
qualitywise as well as quantitywise. Before, the monopoly of the market had seen an ending
phase, the Assets Under Management (AUM) was Rs. 67bn. The private sector entry to the
fund family rose the AUM to Rs. 470 bn in March 1993 and till April 2004, it reached the height
of 1,540 bn.

Putting the AUM of the Indian Mutual Funds Industry into comparison, the total of it is less
than the deposits of SBI alone, constitute less than 11% of the total deposits held by the
Indian banking industry.

The main reason of its poor growth is that the mutual fund industry in India is new in the
country. Large sections of Indian investors are yet to be intellectuated with the concept.
Hence, it is the prime responsibility of all mutual fund companies, to market the product correctly
abreast of selling.

The mutual fund industry can be broadly put into four phases according to the development of
the sector. Each phase is briefly described as under.

First Phase - 1964-87

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the
Reserve Bank of India and functioned under the Regulatory and administrative control of the
Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial
Development Bank of India (IDBI) took over the regulatory and administrative control in place
of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had
Rs.6,700 crores of assets under management.

Second Phase - 1987-1993 (Entry of Public Sector Funds)

Entry of non-UTI mutual funds. SBI Mutual Fund was the first followed by Canbank Mutual
Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov
89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC in 1989 and GIC in
1990. The end of 1993 marked Rs.47,004 as assets under management.

Third Phase - 1993-2003 (Entry of Private Sector Funds)

With the entry of private sector funds in 1993, a new era started in the Indian mutual fund
industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year
in which the first Mutual Fund Regulations came into being, under which all mutual funds,
except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged
with Franklin Templeton) was the first private sector mutual fund registered in July 1993.

The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and
revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual
Fund) Regulations 1996.

The number of mutual fund houses went on increasing, with many foreign mutual funds
setting up funds in India and also the industry has witnessed several mergers and
acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of
Rs. 1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of assets under
management was way ahead of other mutual funds.

Fourth Phase - since February 2003

This phase had bitter experience for UTI. It was bifurcated into two separate entities. One is
the Specified Undertaking of the Unit Trust of India with AUM of Rs.29,835 crores (as on
January 2003). The Specified Undertaking of Unit Trust of India, functioning under an
administrator and under the rules framed by Government of India and does not come under
the purview of the Mutual Fund Regulations.

The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered
with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the
erstwhile UTI which had in March 2000 more than Rs.76,000 crores of AUM and with the
setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with
recent mergers taking place among different private sector funds, the mutual fund industry
has entered its current phase of consolidation and growth. As at the end of September, 2004,
there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes.
 GROWTH IN ASSETS UNDER MANAGEMENT

Note:
Erstwhile UTI was bifurcated into UTI Mutual Fund and the Specified Undertaking of the Unit
Trust of India effective from February 2003. The Assets under management of the Specified
Undertaking of the Unit Trust of India has therefore been excluded from the total assets of the
industry as a whole from February 2003 onwards.

A mutual fund is a professionally managed type of collective investment scheme that

pools money from many investors and invests typically in investment securities (stocks,
bonds, short-term money market instruments, other mutual funds, other securities, and/or
commodities such as precious metals).[1] The mutual fund will have a fund manager that
trades (buys and sells) the fund's investments in accordance with the fund's investment
objective. In the U.S., a fund registered with the Securities and Exchange Commission
(SEC) under both SEC and Internal Revenue Service (IRS) rules must distribute nearly
all of its net income and net realized gains from the sale of securities (if any) to its
investors at least annually. Most funds are overseen by a board of directors or trustees (if
the U.S. fund is organized as a trust as they commonly are) which is charged with
ensuring the fund is managed appropriately by its investment adviser and other service
organizations and vendors, all in the best interests of the fund's investors.

Since 1940 in the U.S., with the passage of the Investment Company Act of 1940 (the '40
Act) and the Investment Advisers Act of 1940, there have been three basic types of
registered investment companies: open-end funds (or mutual funds), unit investment
trusts (UITs); and closed-end funds. Other types of funds that have gained in popularity
are exchange traded funds (ETFs) and hedge funds, discussed below. Similar types of
funds also operate in Canada, however, in the rest of the world, mutual fund is used as a
generic term for various types of collective investment vehicles, such as unit trusts, open-
ended investment companies (OEICs), unitized insurance funds, undertakings for
collective investments in transferable securities (UCITS, pronounced "YOU-sits") and
SICAVs (pronounced "SEE-cavs").

History
Massachusetts Investors Trust (now MFS Investment Management) was founded on
March 21, 1924, and, after one year, it had 200 shareholders and $392,000 in assets. The
entire industry, which included a few closed-end funds, represented less than $10 million
in 1924.

The stock market crash of 1929 hindered the growth of mutual funds. In response to the
stock market crash, Congress passed the Securities Act of 1933 and the Securities
Exchange Act of 1934. These laws require that a fund be registered with the U.S.
Securities and Exchange Commission (SEC) and provide prospective investors with a
prospectus that contains required disclosures about the fund, the securities themselves,
and fund manager. The Investment Company Act of 1940 sets forth the guidelines with
which all SEC-registered funds must comply.

With renewed confidence in the stock market, mutual funds began to blossom. By the end
of the 1960s, there were approximately 270 funds with $48 billion in assets. The first
retail index fund, First Index Investment Trust, was formed in 1976 and headed by John
Bogle, who conceptualized many of the key tenets of the industry in his 1951 senior
thesis at Princeton University.[2] It is now called the Vanguard 500 Index Fund and is one
of the world's largest mutual funds, with more than $100 billion in assets.

A key factor in mutual-fund growth was the 1975 change in the Internal Revenue Code
allowing individuals to open individual retirement accounts (IRAs). Even people already
enrolled in corporate pension plans could contribute a limited amount (at the time, up to
$2,000 a year). Mutual funds are now popular in employer-sponsored "defined-
contribution" retirement plans such as (401(k)s) and 403(b)s as well as IRAs including
Roth IRAs.

As of October 2007, there are 8,015 mutual funds that belong to the Investment Company
Institute (ICI), a national trade association of investment companies in the United States,
with combined assets of $12.356 trillion.[3] In early 2008

Types of mutual funds

[Open-end fund, forms of organization, other funds

The term mutual fund is the common name for what is classified as an open-end
investment company by the SEC. Being open-ended means that, at the end of every day,
the fund continually issues new shares to investors buying into the fund and must stand
ready to buy back shares from investors redeeming their shares at the then current net
asset value per share.

Mutual funds must be structured as corporations or trusts, such as business trusts, and any
corporation or trust will be classified by the SEC as an investment company if it issues
securities and primarily invests in non-government securities. An investment company
will be classified by the SEC as an open-end investment company if they do not issue
undivided interests in specified securities (the defining characteristic of unit investment
trusts or UITs) and if they issue redeemable securities. Registered investment companies
that are not UITs or open-end investment companies are closed-end funds. Closed-end
funds are like open end except they are more like a company which sells its shares a
single time to the public under an initial public offering or "IPO". Subsequently, the
fund's shares trade with buyers and sellers of shares in the secondary market at a market-
determined price (which is likely not equal to net asset value) such as on the New York
or American Stock Exchange. Except for some special transactions, the fund cannot
continue to grow in size by attracting more investor capital like an open-end fund may.

Exchange-traded funds

A relatively recent innovation, the exchange-traded fund or ETF, is often structured as an

open-end investment company. ETFs combine characteristics of both mutual funds and
closed-end funds. ETFs are traded throughout the day on a stock exchange, just like
closed-end funds, but at prices generally approximating the ETF's net asset value. Most
ETFs are index funds and track stock market indexes. Shares are issued or redeemed by
institutional investors in large blocks (typically of 50,000). Most investors buy and sell
shares through brokers in market transactions. Because the institutional investors
normally purchase and redeem in in kind transactions, ETFs are more efficient than
traditional mutual funds (which are continuously issuing and redeeming securities and, to
effect such transactions, continually buying and selling securities and maintaining
liquidity positions) and therefore tend to have lower expenses.

Exchange-traded funds are also valuable for foreign investors who are often able to buy
and sell securities traded on a stock market, but who, for regulatory reasons, are limited
in their ability to participate in traditional U.S. mutual funds.

Equity funds

Equity funds, which consist mainly of stock investments, are the most common type of
mutual fund. Equity funds hold 50 percent of all amounts invested in mutual funds in the
United States.[7] Often equity funds focus investments on particular strategies and certain
types of issuers.

Market Cap(italization)

Fund managers and other investment professionals have varying definitions of mid-cap,
and large-cap ranges. The following ranges are used by Russell Indexes:[8]

• Russell Microcap Index – micro-cap ($54.8 – 539.5 million)

• Russell 2000 Index – small-cap ($182.6 million – 1.8 billion)
• Russell Midcap Index – mid-cap ($1.8 – 13.7 billion)
• Russell 1000 Index – large-cap ($1.8 – 386.9 billion)

Growth vs. value

Another distinction is made between growth funds, which invest in stocks of companies
that have the potential for large capital gains, and value funds, which concentrate on
stocks that are undervalued. Value stocks have historically produced higher returns;
however, financial theory states this is compensation for their greater risk. Growth funds
tend not to pay regular dividends. Income funds tend to be more conservative
investments, with a focus on stocks that pay dividends. A balanced fund may use a
combination of strategies, typically including some level of investment in bonds, to stay
more conservative when it comes to risk, yet aim for some growth.[citation needed]

Index funds versus active management

Main articles: Index fund and active management

An index fund maintains investments in companies that are part of major stock (or bond)
indexes, such as the S&P 500, while an actively managed fund attempts to outperform a
relevant index through superior stock-picking techniques. The assets of an index fund are
managed to closely approximate the performance of a particular published index. Since
the composition of an index changes infrequently, an index fund manager makes fewer
trades, on average, than does an active fund manager. For this reason, index funds
generally have lower trading expenses than actively managed funds, and typically incur
fewer short-term capital gains which must be passed on to shareholders. Additionally,
index funds do not incur expenses to pay for selection of individual stocks (proprietary
selection techniques, research, etc.) and deciding when to buy, hold or sell individual
holdings. Instead, a fairly simple computer model can identify whatever changes are
needed to bring the fund back into agreement with its target index.

Certain empirical evidence seems to illustrate that mutual funds do not beat the market
and actively managed mutual funds under-perform other broad-based portfolios with
similar characteristics. One study found that nearly 1,500 U.S. mutual funds under-
performed the market in approximately half of the years between 1962 and 1992.[9] An
analysis of the equity funds returns of the 15 biggest asset management companies
worldwide from 2004 to 2009 showed that about 80% of the funds have returned below
their respective benchmarks.[citation needed] Moreover, funds that performed well in the past
are not able to beat the market again in the future (shown by Jensen, 1968; Grinblatt and
Sheridan Titman, 1989).[10]

Bond funds

Bond funds account for 18% of mutual fund assets.[7] Types of bond funds include term
funds, which have a fixed set of time (short-, medium-, or long-term) before they mature.
Municipal bond funds generally have lower returns, but have tax advantages and lower
risk. High-yield bond funds invest in corporate bonds, including high-yield or junk
bonds. With the potential for high yield, these bonds also come with greater risk.

Money market funds

Money market funds hold 26% of mutual fund assets in the United States.[11] Money
market funds generally entail the least risk, as well as lower rates of return. Unlike
certificates of deposit (CDs), open-end money fund shares are generally liquid and
redeemable at "any time" (that is, normal business hours during which redemption
requests are taken - generally not after 4 PM ET). Money funds in the US are required to
advise investors that a money fund is not a bank deposit, not insured and may lose value.
Most money fund strive to maintain an NAV of $1.00 per share though that is not
guaranteed; if a fund "breaks the buck", its shares could be redeemed for less than $1.00
per share. While this is rare, it has happened in the U.S., due in part to the mortgage crisis
affecting related securities.

Funds of funds

Funds of funds (FoF) are mutual funds which invest in other mutual funds (i.e., they are
funds composed of other funds). The funds at the underlying level are often funds which
an investor can invest in individually, though they may be 'institutional' class shares that
may not be within reach of an individual shareholder). A fund of funds will typically
charge a much lower management fee than that of a fund investing in direct securities
because it is considered a fee charged for asset allocation services which is presumably
less demanding than active direct securities research and management. The fees charged
at the underlying fund level are a real cost or drag on performance but do not pass
through the FoF's income statement (statement of operations), but are usually disclosed in
the fund's annual report, prospectus, or statement of additional information. FoF's will
often have a higher overall/combined expense ratio than that of a regular fund. The FoF
should be evaluated on the combination of the fund-level expenses and underlying fund
expenses, as these both reduce the return to the investor.

Most FoFs invest in affiliated funds (i.e., mutual funds managed by the same advisor),
although some invest in unaffilated funds (those managed by other advisors) or both. The
cost associated with investing in an unaffiliated underlying fund may be higher than
investing in an affiliated underlying because of the investment management research
involved in investing in fund advised by a different advisor. Recently, FoFs have been
classified into those that are actively managed (in which the investment advisor
reallocates frequently among the underlying funds in order to adjust to changing market
conditions) and those that are passively managed (the investment advisor allocates assets
on the basis of on an allocation model which is rebalanced on a regular basis).

The design of FoFs is structured in such a way as to provide a ready mix of mutual funds
for investors who are unable to or unwilling to determine their own asset allocation
model. Fund companies such as TIAA-CREF, American Century Investments, Vanguard,
and Fidelity have also entered this market to provide investors with these options and
take the "guess work" out of selecting funds. The allocation mixes usually vary by the
time the investor would like to retire: 2020, 2030, 2050, etc. The more distant the target
retirement date, the more aggressive the asset mix.

Hedge funds
Main article: Hedge fund

Hedge funds in the United States are pooled investment funds with loose, if any, SEC
regulation, unlike mutual funds. Some hedge fund managers are required to register with
SEC as investment advisers under the Investment Advisers Act of 1940.[12] The Act does
not require an adviser to follow or avoid any particular investment strategies, nor does it
require or prohibit specific investments. Hedge funds typically charge a management fee
of 1% or more, plus a “performance fee” of 20% of the hedge fund's profit. There may be
a "lock-up" period, during which an investor cannot cash in shares. A variation of the
hedge strategy is the 130-30 fund for individual investors.

Mutual funds vs. other investments

Mutual funds offer several advantages over investing in individual stocks. For example,
the transaction costs are divided among all the mutual fund shareholders, which allows
for cost-effective diversification. Investors may also benefit by having a third party
(professional fund managers) apply expertise and dedicate time to manage and research
investment options, although there is dispute over whether professional fund managers
can, on average, outperform simple index funds that mimic public indexes. Yet, the Wall
Street Journal reported that separately managed accounts (SMA or SMAs) performed
better than mutual funds in 22 of 25 categories from 2006 to 2008. This included beating
mutual funds performance in 2008, a tough year in which the global stock market lost
US$21 trillion in value.[13][14] In the story, Morningstar, Inc said SMAs outperformed
mutual funds in 25 of 36 stock and bond market categories. Whether actively managed or
passively indexed, mutual funds are not immune to risks. They share the same risks
associated with the investments made. If the fund invests primarily in stocks, it is usually
subject to the same ups and downs and risks as the stock market.
Share classes

Many mutual funds offer more than one class of shares. For example, you may have seen
a fund that offers "Class A" and "Class B" shares. Each class will invest in the same pool
(or investment portfolio) of securities and will have the same investment objectives and
policies. But each class will have different shareholder services and/or distribution
arrangements with different fees and expenses. These differences are supposed to reflect
different costs involved in servicing investors in various classes; for example, one class
may be sold through brokers with a front-end load, and another class may be sold direct
to the public with no load but a "12b-1 fee" included in the class's expenses (sometimes
referred to as "Class C" shares). Still a third class might have a minimum investment of
$10,000,000 and be available only to financial institutions (a so-called "institutional"
share class). In some cases, by aggregating regular investments made by many
individuals, a retirement plan (such as a 401(k) plan) may qualify to purchase
"institutional" shares (and gain the benefit of their typically lower expense ratios) even
though no members of the plan would qualify individually.[15] As a result, each class will
likely have different performance results.[16]

A multi-class structure offers investors the ability to select a fee and expense structure
that is most appropriate for their investment goals (including the length of time that they
expect to remain invested in the fund).[16]

Load and expenses

Main article: Mutual fund fees and expenses

A front-end load or sales charge is a commission paid to a broker by a mutual fund when
shares are purchased, taken as a percentage of funds invested. The value of the
investment is reduced by the amount of the load. Some funds have a deferred sales charge
or back-end load. In this type of fund an investor pays no sales charge when purchasing
shares, but will pay a commission out of the proceeds when shares are redeemed
depending on how long they are held. Another derivative structure is a level-load fund, in
which no sales charge is paid when buying the fund, but a back-end load may be charged
if the shares purchased are sold within a year.

Load funds are sold through financial intermediaries such as brokers, financial planners,
and other types of registered representatives who charge a commission for their services.
Shares of front-end load funds are frequently eligible for breakpoints (i.e., a reduction in
the commission paid) based on a number of variables. These include other accounts in the
same fund family held by the investor or various family members, or committing to buy
more of the fund within a set period of time in return for a lower commission "today".

It is possible to buy many mutual funds without paying a sales charge. These are called
no-load funds. In addition to being available from the fund company itself, no-load funds
may be sold by some discount brokers for a flat transaction fee or even no fee at all. (This
does not necessarily mean that the broker is not compensated for the transaction; in such
cases, the fund may pay brokers' commissions out of "distribution and marketing"
expenses rather than a specific sales charge. The buyer is therefore paying the fee
indirectly through the fund's expenses deducted from profits.)

No-load funds include both index funds and actively managed funds. The largest mutual
fund families selling no-load index funds are Vanguard and Fidelity, though there are a
number of smaller mutual fund families with no-load funds as well. Expense ratios in
some no-load index funds are less than 0.2% per year versus the typical actively managed
fund's expense ratio of about 1.5% per year. Load funds usually have even higher
expense ratios when the load is considered. The expense ratio is the anticipated annual
cost to the investor of holding shares of the fund. For example, on a $100,000 investment,
an expense ratio of 0.2% means $200 of annual expense, while a 1.5% expense ratio
would result in $1,500 of annual expense. These expenses are before any sales
commissions paid to purchase the mutual fund.

Many fee-only financial advisors strongly suggest no-load funds such as index funds. If
the advisor is not of the fee-only type but is instead compensated by commissions, the
advisor may have a conflict of interest in selling high-commission load funds.