Mutual funds and other investment companies - Mutual funds

8 important questions on Mutual funds and other investment companies - Mutual funds

What are mutual funds?

Mutual funds are the common name for open-end investment companies.

What are money market funds?

These funds invest in money market securities such as com- mercial paper, repurchase agreements, or certificates of deposit. The average maturity of these assets tends to be a bit more than 1 month.

What are equity funds?

Equity funds invest primarily in stock, although they may, at the portfo- lio manager’s discretion, also hold fixed-income or other types of securities. Equity funds commonly will hold between 4% and 5% of total assets in money market securities to provide liquidity necessary to meet potential redemption of shares.
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What is the difference between income funds and growth funds?

Income funds tend to hold shares of firms with consistently high dividend yields. Growth funds are willing to forgo current income, focusing instead on prospects for capital gains. Growth stocks, and therefore growth funds, are typically riskier and respond far more dramatically to changes in economic conditions than do income funds. 

What are the several international funds?

Global funds invest in securities worldwide, including the United States. In contrast, international funds invest in securities of firms located outside the United States. Regional funds concentrate on a particular part of the world, and emerging market funds invest in companies of developing nations.

What are balanced funds and the several types of balanced funds?

Some funds are designed to be candidates for an individual’s entire investment portfolio. Life-cycle funds are balanced funds in which the asset mix can range from aggressive (primarily marketed to younger investors) to conservative (directed at older investors). Static allocation life-cycle funds maintain a stable mix across stocks and bonds, while targeted-maturity funds gradually become more conservative as the investor ages. 

What are asset allocation and flexible funds?

These funds are similar to balanced funds in that they hold both stocks and bonds. However, asset allocation funds may dramatically vary the proportions allocated to each market in accord with the portfolio manager’s fore- cast of the relative performance of each sector. Hence these funds are engaged in market timing and are not designed to be low-risk investment vehicles.

What are index funds?

An index fund tries to match the performance of a broad market index. The fund buys shares in securities included in a particular index in proportion to each secu- rity’s representation in that index.

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