An investor’s portfolio can be homogeneous as in equity and stock funds or be heterogeneous where a proportion of both can be present in the fund.
This is second part of our Mutual Funds Series. Read first part here > Equity V/s Bonds V/s Balanced Fund: The Basics Explained
Targeted Mutual Funds
Targeted funds or target date funds are mutual fund investments which recalibrate the blend of stocks, bonds and cash equivalents with respect to the maturity time frame. For this, the blend of a targeted fund for 10 years will not be same as the blend of an investment fund for 20 years. Because of this particular of target date funds, they are often combined or disguised as retirement plan investments.
Key features & advantages
To realize the true benefits and properties of targeted funds, let’s consider this: two persons, one have 10 years of service left in his career and the other have 20 years of service left, invested in mutual funds of same amount and same fund managing company.
The blend of the targeted mutual fund with the target date after ten years would hold relatively more bonds and cash equivalents and lesser stocks so that it would be less volatile and more possible to contain the assets the investor needs after ten year.
At the same time, the blend of the targeted mutual fund with the target date after twenty years would be concentrated on stocks with an apparently small percentage of bonds and cash equivalents. This way that person’s investments have more chance of growth with higher risk.
Money Market Funds
The money market fund can be characterized by its two parameters: low risk and low return. This is a safe house for investors where their investments are easily accessible and totally liquid.
- They are 100% liquid that is the investment is not tied up for a period to mature.
- Even it is a cash equivalent asset the money market rates are much higher than the rates paid on regular checking and savings accounts.
Some of the money market mutual funds have limited cheque writing privileges. Thus they can be compared to short term CDs (certificate of deposit) they CDs are not 100% liquid.
The components of a money market fund consists of short-term securities representing high-quality, liquid debt and monetary instruments. Even though the word ‘rate’ is often used in association with them there is actually no interest from money market funds. But the interest of the investors’ money is paid to shareholders in the form of dividends, commonly expressed as a rate of return.
The principle objective of money market funds is to earn this interest for the shareholders along with maintaining a net asset value of 1$ per share. Apart from being highly liquid and having no risk, these funds are attractive to investors as they have no entry or exit fee.
A stock market index is a measurement of the value of a section of the stock market. The section that index projects varies from index to index. MSCI World and S&P Global 100 are examples for stock market index that are composed of global stocks.
While American S&P 500, the Japanese Nikkei 225, and the British FTSE 100 are national stock market indices that compute value of stocks of large companies listed on the corresponding county’s stock exchanges. These indices are generated from the prices of the stocks listed in the index, most often their weighted average.
Key features & advantages
When a mutual fund has a portfolio composed of the listings in a particular index, then it can be called as an index fund. An index fund will be assembled to match or track the listings of a market index, such as a BSE index fund which hold securities listed in the BSE index and may be in proportion of the weightage given in index.
This method is called indexing and is a passive form of fund management. The primary advantage of this method is the low cost of management. Also some of the index funds are proven successful than most of the actively managed funds.
Global mutual funds are those invests the shareholders’ money in stocks and bonds throughout the world. Therefore it is also known as world fund. In contrast to the international mutual funds which only invest in securities issued outside the investors’, global fund invests in home country securities also.
Key features & advantages
The obvious advantage here is that the fund manager can buy stocks and bonds irrespective of their regions if he/she found it fit for high returns. Therefore upon observation if a particular market is declining or underperforming then the fund manager can move the assets to another regional market with better potential.
An example for this is, if a global fund managed in India has assets in the European market which the fund manager finds underperforming, then he can sell the stocks and the buy their counterparts from the US market without changing much of the composition of the fund. Therefore the nonrestrictive policy benefits in less time and low cost.
What are the key risks?
Through global funds there can be additional opportunities for diversification but at the same time global funds are vulnerable to the foreign country’s currency fluctuation and even political instabilities. The movements in currency values can both increase and decrease the NAV of the fund. But when diversified these risks are minimized.