What are the Different Types of Mutual Funds

There are two additional considerations in the selection of funds. First is how fund shares are valued, and second is to understand the distinction between different kinds of mutual funds.

You will find daily listings for net asset value (NAV). This is the ending day value of the fund's entire portfolio, divided by shares outstanding.

NAV is always calculated as of the day's closing prices. An ETF or closed-end fund, in comparison, changes in value throughout the trading day just like shares of stock that are publicly listed.
This is most commonly used to track mutual fund performance. As NAV rises, it indicates positive results. And as it falls, it means negative outcome.

However, NAV is not necessarily the best method for judging a fund's performance. Because a fund pays all of its capital gains, dividends, and interest to shareholders, different levels of current income will not be reflected in the reported NAV price. A more accurate measure is the fund's annual total return.

Key Point

NAV does not give you the best picture of relative value, because all current earnings are distributed in cash or reinvested to buy new shares; total annual return is a more reliable comparative measurement of fund performance.

Performance is going to depend on the type of fund and how that classification performs in today's market. Of course, performance also varies based on management's selection of a portfolio and timing for its entry and exit decisions. There are nine major categories. These are:
  1. Equity funds are the best-known ones. These invest in stocks. Because mutual funds are considered 'institutional' investors, they trade in large blocks of stock compared to the relatively few shares traded by individuals, or retail investors.
  2. Fixed-income funds (or 'income funds') specialize in either bonds generating interest income, or stocks with exceptionally high dividends. These are both forms of income. Capital gains are also earned in these funds from selling stock above purchase price, or from redeeming bonds at face value when they were purchased at a discount.
  3. Balanced funds combine potential growth from equity investments with potential income from dividends and interest.
  4. Specialty funds are designed to pursue companies with specific features, in addition to defining themselves as equity, fixed-income, or balanced funds. An example is the 'green fund' which includes only green technology companies in their portfolio. A global fund is another specialty fund that seeks positions in companies operating or based outside of the United States.
  5. Money market funds invest only in instruments in the money market, which are interest-yielding and will not offer growth potential. These include certificates of deposit, U.S. Treasury bills, bankers' acceptances, and commercial paper.
  6. Hedge funds are not set up or regulated like any others in the fund universe. They are usually private partnerships that accept a limited number of investors and require a large deposit to participate. They use leverage through derivatives and other advanced techniques to create high returns (or high losses).
  7. Capitalization-based funds specialize in companies of a specific market cap size. So there are large-cap, mid-cap, and small-cap funds suited for investors who believe the best returns will be found in one of those categories.
  8. Index funds do not buy stocks specifically, but invest in the broader market by tracking performance in an index like the S&P 500, the Dow Jones Industrial Average (DJIA), or other indexes that define and track market performance.
  9. Tax-free bond funds are similar to fixed-income funds in the sense that they take positions in bonds. However, this group buys only those bonds that are exempt from income tax. To determine whether such a fund is appropriate, investors should compare the after-tax return from the fixed-income fund to the tax-free return in this type of fund.
By Michael C. Thomsett

Copyrighted 2020. Content published with author's permission.

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