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Mutual Fund Basics
Less Popular Types of Mutual Funds - Part 2
by InvestorGuide Staff (Write for us!)
(Click on the links within the article to get definition of that word)
"Funds of funds" (FOFs) are meta-mutual funds; that is, they are mutual funds that invest in other mutual funds. Just as a normal mutual fund invests in a number of different securities, so an FOF buysshares of many different mutual funds. These funds were designed to achieve even greater diversification than normal mutual funds; however, they suffer from several drawbacks. Expense fees on FOFs are typically higher than those on regular funds because they include part of the expense fees charged by the underlying funds. But even FOFs with low fees may suffer from another disadvantage: duplication. Since FOFs buy many different funds which themselves invest in many different stocks, it is possible for the FOF to own the same stock through several different funds. Most experts say that FOFs are not terribly useful, given that one or a few mutual funds can provide adequate diversification without the second level of fees.
Starting in the early 1990s, many mutual fund families began offering "lifecycle" funds designed to carry investors from one stage of life to the next. The idea is to offer investors three types of funds -- highgrowth, average growth, and low growth -- that they can switch between
as their risk tolerance changes once they move from youth to middle age to retirement. Although lifecycle funds all share the common goal of first growing and then later preserving principal, they can contain any mix of stocks, bonds, and cash.
Institutional Funds
Institutional funds are mutual funds that targetpension funds, endowments, the wealthy, and other multi-million dollar investors. Their main objective is to reduce risk, so they invest in hundreds of different securities, which makes these funds among the most diversified funds available. They also do not tend to trade securities very often, so they are able to keep operating costs to a minimum. Although in the past investors typically needed at least $1 million in order to invest in an institutional fund, nowadays some discount brokers offer access to these funds for more modest sums of money, such as $1,000-$5,000.
Perhaps the most subjective of all the types of mutual funds, socially responsible funds aim to invest only in companies that adhere to certain ethical and moralprinciples. Exactly what this means obviously varies from fund to fund, but some examples include: funds that only invest in environmentally conscious companies ("green funds"), funds that invest in hospitals and healthcare centers, and funds that avoid investing in alcohol or tobacco companies. Socially responsible funds try to maximize returns while staying within these self-imposed boundaries.
Contrarian funds seek to make a profit by investing in the opposite direction of the prevailing marketsentiment. During the extended bull market of the 1990s this term actually came to be equated with bear market investing, but really it just means investing in the opposing direction . Contrarian funds will invest in bonds when the stock market is high (in anticipation that it will fall) and stocks when the stock market is low (in anticipation it will rise).
UnitInvestment Trusts (UITs) technically are not a type of mutual fund, but they behave similarly to them. Like mutual funds, UITs pool together money from a group of investors and then use that money to purchase a basket of securities (usually bonds but occasionally stocks). Unlike mutual funds, however, UITs do not later buy and sell more securities for their portfolio -- in other words, a UIT's portfolio is frozen after the initial securities are bought. And unlike mutual funds, UITs have expiration dates (usually anywhere from one to five years); after a UITexpires, investors may choose to receive their investment in cash (minus operatingcosts and sales charges) or they can roll over their investment into a new UIT. Some investors prefer UITs to mutual funds because UITs typically incur lower annualoperating expenses (since they are not buying and selling shares); however, UITs often have steep salescharges and entrance/exit fees that could end up costing more than the fees paid to a mutual fund. The other problem with UITs is that they can only be purchased through the investment houses that created the trust and not on the open market. This can make it difficult for investors to find pricinginformation for
the UIT, and so it can be quite difficult for investors to compare prices across UITs before deciding which one to purchase.
Option and futures funds are among the most risky mutual funds available. This is because the fund does not own the securities underlying the options or the futures; it only owns the right or the obligation to buy or sell those securities at a certain date in the future . The goal of option and futures funds is primarily capital appreciation, although sometimes they are used to hedge against prevailing market conditions. Most option and futures funds have minimum networthrequirements and are not appropriate investments for inexperienced investors (just as options and futures aren't appropriate for beginners).
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