Mutual Fund Types

Fund Type Investment Investments Risks Client Suitability

Objectives
INCOME
Money Market - Stable returns -MM investments - Low interest rate risk -Risk averse investors
- Safety of capital & with term < 1 year - Low default risk -Parking money
liquidity -avg term < 90 days -Short-term
Mortgage - Current income from -NHA insured - Lower default risk – -want safety of capital
mortgage portfolio mortgages mostly NHA guaranteed with a steady stream of
- Safety of capital - Lower interest rate risk income (lower than bond
- shorter terms & fund due to lower risk)
monthly principal
payments

Bond - Current income -gov’t, corporate & - Interest rate risk -safety & income
- Safety of capital foreign - Default risk
- Some capital gains - ST & LT
Dividend - tax preferred income -mostly preferred - Interest rate risk -moderate risk takers
- DTC shares -Default risk -want steady tax-
- Safety of capital -some blue chip -market risk preferred income with

m
common shares capital gains potential

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Growth &

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Income

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Balanced - Current income -bonds & stocks - Most try to time the -moderate risk taker

o.
- Capital gains - req’d minimum of market -wants income & capital

rs e
- Safety of capital each -interest rate risk
-default
gain potential
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-market, business
Asset Allocation - Current income -bonds & stocks - try to time the market -moderate to high risk
- Capital gains -usually no -interest rate risk taker
o

- Safety of capital restrictions on asset -default -want income & capital

mix -market, business gains
aC s

Growth
vi y re

Equity - Capital gains -primarily common - Market risk -moderate to high-risk

- Current dividend shares -Business risk investor
income -small/large -depends on fund focus -seeking LT capital
companies, specific growth
ed d

sector
Equity - index - Capital gains -common shares in -market risk
ar stu

- Match performance specific index -business risk

of index
- Lower fees
Global equity - Capital gains -common shares in - Market risk of country -moderate to high risk
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foreign countries -Foreign exchange risk investors who want

Th

-Liquidity & efficiency international

of capital markets diversification
-Business risk
Specialty - Capital gains -common shares in - Lack of diversification -high risk investors
specific industry or - Commodity price
sh

geographic area changes

Real Estate -tax advantaged -commercial & -property risk -high risk investors
income industrial property -liquidity risk seeking tax advantaged
-capital gains -interest rate risk income - LT
-economic risk
Commodity -capital gains -derivatives & -commodity risk -sophisticated, high risk
Pools physical -trading risk investors
commodities

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 Mutual Fund Types – 2

1) Complete the matching exercises below:

m
er as
co
eH w
o.
rs e
ou urc
o
aC s
vi y re
ed d
ar stu
is
Th
sh

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 1) Money Market ________
2) Money Market ________
3) Asset Allocation ________
4) Mortgage _______
5) Mortgage _______
6) Bond ________
7) Bond ________
8) Dividend __________
9) Equity _________
10) Equity _________
11) Balanced ________
12) Global __________
13) Global __________
14) Specialized ____________
15) Real estate _________
16) Equity – index __________
17) Equity – index __________

m
er as
a) Mostly NHA guaranteed

co
b) Business risk

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c) Lack of diversification
d) Foreign exchange risk

o.
e) Safety & liquidity
f) rs e
Match market performance
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g) No restrictions on asset mix
h) Lower fees
i) Low interest rate risk – shorter maturity
j) Interest rate & default risk
o

k) Adjust asset mix to time the market

aC s

l) Some capital gains

vi y re

m) Commercial & industrial properties

n) Liquidity & efficiency of capital markets risk
o) Tax-advantaged income (DTC)
p) Market risk
q) Low interest rate risk
ed d
ar stu
is
Th
sh

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 Mutual Fund Types - 3
2) Give specific examples of risks in the table below.

Risk Type Example – events causing  prices Example – events causing  prices
BONDS
Interest Rate Risk Interest up, inflation up

Default Risk Debt/equity ratio down

Liquidity Risk Volume of bonds up

Political Risk Stable majority gov’t, v.b gov’t policy

Foreign Exchange Risk

Maturity Risk

EQUITY

m
Market Risk

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Business Risk

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Liquidity Risk

o.
Foreign Exchange Risk rs e
ou urc
Political Risk
o
aC s

3) Answer the following

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1) What is 1 objective of a Mortgage fund?

2) What is one risk of a specialized equity fund?
3) Name 1 risk of an equity mutual fund.
ed d

4) What are the risks of a Money Market fund?

5) What is one risk of a Bond fund?
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6) In what scenario will interest rate risk have a negative impact on a Bond fund?
7) Why do Mortgage funds have a relatively low default risk?
8) Why is the return of growth style equity funds relatively volatile?
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9) Name 1 risk of a global equity fund – in addition to the standard risk of equity funds.
10) Name another risk.
Th

11) What is the investment objective of Index Equity funds?

12) What is an advantage of Index Equity funds?
13) Name 1 investment objective of a Money Market fund.
sh

14) What is one objective of a Bond fund?

15) If a fund manager thought that interest rates were going to increase, how would she change the
investment in a bond fund?
16) How is the NAV of a Mortgage fund calculated?
17) What is the usual NAVPS of a Money Market fund?
18) Are you tired of answering questions yet?

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