Any investor when making financial investments can follow only three important and distinctive objectives: – keeping the value of the invested money (investing in a monetary system that is stable to protect the income in under-evolved economies)
– gaining a profit from the invested money (most typical example are the bank deposits that regulate pay out income under the name of interest) – increasing the value of the invested money (when investments are made in stocks or land/buildings)
To satisfy the diversified objectives of the investors, the mutual funds administrators created three big fund types that have as a purpose meeting the respective objectives through different placement politics. Technically speaking the three types are:
Ø Monetary Funds The monetary funds have as an investing objective keeping the value of the invested money. These types of funds are generally addressed to investors that, because of aversion towards risk or other motives (like needing the invested money in a short time), don’t want the value of their investment to decrease. Until now, in the USA, there has never been a monetary fund that ever signalized a decrease in the title value.
The monetary funds can be successfully used to efficiently evaluate and sustain the current bank accounts (of individuals or companies). There are countries where payments can be made right out of the monetary fund, because sometimes these funds act just like a current bank account. Monetary funds invest usually in stocks that generate income and the variation in profit is very low. Their main investment areas are: national/state bonds, bank deposits, commerce effects emitted by commercial banks or commercial companies with an average withdraw limit of 90 days (they only choose low withdraw limits).
Ø Income Funds These funds have as an investing objective gaining a profit from the invested money or generating stable income. They are addressed to those that need supplementary stable income in addition to their current income. Since the majority of the incomes made by the fund are distributed to investors, the stock value doesn’t suffer significant variation. Still, because of the structure of the portfolio, there is a risk that the stock value would decrease.
Generally, investors in income funds are retired persons, young families or families that have to pay for their children’s studies. The investors can opt for cashing the distributed incomes or for reinvesting them automatically in the fund. The income funds will invest mostly in stocks that generate high incomes, but because of the long periods before withdrawal it is possible that they become exposed to value variations. The main investment fields are: bonds, asset mortgages, preferential stocks, common stocks emitted by very good companies with a rule of distributing consistent dividends.
Ø Growth Funds
The main categories that invest in growth funds are mature families that have already satisfied their basic material necessities (a house, a car and other assets) and they can afford to risk some of their current incomes with an investment that has a higher risk factor. Of course, in these kinds of funds the investors can also be persons with an appetite for risk. Within the category of growth funds we distinguish a different subcategory, named accumulation funds. These funds are the fund in which the investor, with the help of a contract sighed, has the responsibility to regularly invest in stocks (monthly, quarterly). Also they may sound like they belong to a different type, they are nevertheless growth funds.
A growth fund will invest in stocks whose value is considerably variable over time, any types of stocks, convertible bonds, options and futures contracts.
There are many other funds classifications, by the geographical zones they invest in, by the risk factor of the portfolio, etc., but, leaving these details aside, any fund will fit into one of the three categories presented above.
Manshu, can you clarify this line ? “Since the majority of the incomes made by the fund are distributed to investors, the stock value doesn�t suffer significant variation”
How does the stock value depend on income distribution?
This type of classification based on “monetary” objectives makes more sense to common investor than classifying MF’s based on jargons like Equity funds, Debt funds etc etc.