Investors Just Want to Have Fund: A Dozen Different Funds and Terms
Know Your funds Before You Invest
What with all the different fund terminology floating around the investment world in the 21st Century, it’s a wonder that experts and newcomers alike don’t get confused from, if you will, staring in the fund-house mirror.
But deciphering the world of funds need not require months of study, let alone decades of market experience. When you take your first stab at demystifying the fund experience, remember that the most basic root term is itself a lot like “apple" (not the stock, mind you).
That is: Funds come in a wide variety of flavors. And in many cases, they represent a pooled investment, a complete portfolio of investments, or often both.
Here we take a look at a dozen different types of funds and fund terms that you can use to fill up your market basket or take a dive into if your resources and risk tolerance are sizable. As in the wider scope of investment, finding the right type of fund depends upon your goals—whether that be a retirement income stream, finding a risk-free spot to hold cash for a time or supporting a cause that you care about while you make a profit.
Some of the funds that we take a look at here represent private investments, others public: Maybe that’s where the old cliche about “apples and oranges” comes in. As for whether those two crops have their own investment funds, that's a market story for another time.
Also referred to as hybrid funds, the term “balance” refers to the types of investments that are held: stocks and bonds. That usually refers to an almost even balance as well, as a typical weight for balanced funds is 60 percent stocks and 40 percent bonds. If a third component enters the picture, it’s often a money market fund (see below).
Universally known by their acronym, ETFs are securities that track a commodity, asset group (such as an index fund) or a given index of stocks (such as the Standard & Poor’s 500). It trades like a stock on an exchange and goes through price changes daily as ETFs get bought and sold. To learn what an index fund is, keep reading…
Fixed Income Funds
Especially for those at or near retirement age, these funds are designed to deliver a set rate of return (and thus resemble what’s known as a fixed annuity). The common components of a fixed income fund, in order of increasing risk level, include government bonds, investment-grade corporate bonds and high-yield corporate bonds.
Fund of Funds
A fund of funds is a basket of investments were the various components are other funds themselves. The advantage of this is instant diversification: Every dollar spreads out across a broad range holdings instantly.
A money manager who directs the investment strategy and trading activity of a fund along a spectrum that ranges from aggressive to conservative. These managers are paid a percentage of the total amount of assets in the fund. One of the most famous was Peter Lynch. In his tenure with the Fidelity Magellan Fund from 1977 to 1990, Lynch managed one of the most successful mutual funds of all time.
Hedge funds are reserved for experienced investors such as institutions or wealthy individuals who have a net worth of more than $1 million. Money invested in a hedge fund must remain there for at least a year or more, and the funds themselves often employ risky strategies such as using borrowed money to invest.
As the name implies, this fund contains key stocks from a certain index, such as the S&P 500. The goal of an index fund is to follow the movement of the index as a whole—so if the S&P 500 goes up, the index fund should go up as well. Ditto for when the market goes down, which is why investors will want to look at staying in long term as opposed to short term.
Money Market Fund
Think of a money market fund as a safe, temporary place to park your money. These are low-risk, low-return investments where shares are always worth $1, and where the low-interest rate environment has meant next to zero return for investors. (Even the label "investor" should be used lightly, since a mutual fund often serves as a less liquid savings repository outside of a traditional bank account.) As of 2016, the highest paying money market accounts might reap roughly 1 percent interest.
With this fund, you’re grouped with “mutual” investors in owning a collection of stocks, bonds, real estate or other securities. Mutual funds are professionally run and investors can liquidate their holdings at any time. Some examples listed in this piece (including specialty funds and balanced funds) are considered mutual funds.
Series A Funds
Score one for the entrepreneurs. Series A refers to the first round of venture capital investment a new company receives. It’s a common way for high-tech startups to fuel their efforts, and is often succeeded by a second round called—you guessed it—Series B.
These particular funds have a narrowcast focus based on particular investor interests or concerns. This could be a socially conscious fund, for example, or one dedicated to a cause such as clean drinking water. They will often avoid particular sectors as well, ranging from alcohol production to the gun industry.
These funds are tied to a future “target date” when the investor cashes in their investment, often determined by retirement or a child’s entrance into college. Commonly, the investment strategies of these funds get more conservative as the target approaches.