Mutual funds
Introduction
The paper includes a discussion on mutual funds and their characteristics, the various types of bond and stock mutual funds and the features of money market funds. A discussion on mutual funds performance in the stock market is also explored.
There many types of mutual funds and every mutual fund have different rewards and risks. Basically for the mutual funds the greater the potential return, the greater the risk or loss. Some funds have less risk than others, they have some risk and it is not possible for one to diversify all risk. Every fund has an investment projective that is predetermined and which describes the assets of the funds, investment area and strategies for investment. Basically, there are three kinds of mutual funds which include equity funds, money markets and fixed-income funds (Madura, 2016). All these funds are aimed at different investment areas and objectives.
Money market funds comprises of debt instruments that are short-term and especially treasury bills, government bonds, certificates of deposit and commercial paper. They don’t provide high returns but the investor does not have to worry about losing their principal (U.S. Securities And Exchange Commission, n.d).
Fixed income / bond income funds: they buy investments that have fixed return rates such as government bonds, corporate bonds that have high yields and corporate bonds. They aim of investment is to have the fund receiving money regularly and especially through interest earned. Corporate bond funds have greater risk than investment-grade and government bonds (Laopodis , 2012).
Equity funds invest in various stocks with an aim of growing faster than fixed income and money market funds and hence there is a higher risk of losing money. One can choose from various kinds of equity funds and these include those that specialize on income funds, growth stocks, and small-cap, mid- cap and large-cap stocks or a combination of all of them (Laopodis , 2012).
Balanced funds invest in various equities and securities with fixed income. They aim at balancing the objective of higher returns achievement against the risk of money loss and many of them follow a formula in splitting money among various investment types. They are more risky than funds with fixed income and are less risky than equity funds(Laopodis , 2012).
Index funds aim at tracking a specific index performance and the mutual fund value will increase or decrease as the index increases or decreases. They are normally less costly than mutual funds that are actively managed since the portfolio manager need not do much research or come up with as many decisions of investment. An investor in this fund perceives that many of the managers cannot neat the market (Laopodis, 2012). The index fund resembles the returns in the market and offers benefits to the investors as low fees.
Specialty funds aim at specialized mandates like real estate, investments that are socially responsible or commodities. They comprise of fund which are known to be popular but not necessarily belonging to other described categories. They forego wide diversification to focus on a specific sector of the economy. Sector funds are aimed at a particular economic sector such as technology, health or financial sectors and they are normally very risky. There is a high likelihood of greater gains even if the sector the funds are volatile. Regional funds focus on a certain area of the world and have an advantage in making it easier to purchase stock in markets abroad, which is normally difficult to do (Laopodis , 2012).
Characteristics of money market funds
These funds have high level of liquidity given that they are fixed-income securities having short-term maturity of one year or less. Their degree of safety is relatively high because of high credit ratings of the issuers who include the government and corporations. In addition, these funds have discount pricing, in that their issuance is done at a discount to face value (U.S. Securities And Exchange Commission, n.d).
The best performing mutual fund is JM Smucker Co with a YTD return of 0.56 percent with net asset value of 366.73 million as per January 2017. The range of five year return for the fund is 70.50-157.31. The ranking on this funds changes frequently due to change in investor’s portfolio. V. There are various constraints that can be imposed in the process of selecting. These constraints includes the length of the funds, whether long-term or short-term, the issuer of the funds and the ranking of the past performance of the funds. The tenure of the fund manager is another constraint that can determine the selection of the fund. The ratings of the funds in terms of the rates of return and risk are also a constraint that can be considered while selecting the funds. In addition, the year-to-date yield and the kind of funds to be used and the liquidity of the investor determine the selection of funds (Madura, 2016). The liquidity of the investor determines the initial level of investment to be undertaken by the investor. The time constraint depends on the goals of the investor whether they desire long-term or short-term investments. It also impacts on the variety of assets in which one should invest in given that the less time scope, the less risk or volatility that can be tolerated by the investor in their portfolio (Madura, 2016). In addition, liquidity constraint can also impact on the asset to dispose of in order to buy a new investment. VI.The MVC’s price and its trend does not compare with S&P stock index movement which is shown by the decrease in the price for MVC while the price movements at S&P tends to have an upward movement. While the MVC’s prices have been decreasing since June, 2014 the stock index movement at S&P shows a relative increment during the same period.
Interest rate 1.9
Return of MVC (Q308) = 18-59 -15.95 /15.59 = 0.17 percent
Change of interest (Q308) = 4.04- 1.67/1.67 = 1.42 percent
There is a negative relationship between the return for the MVC stock and the movement on the interest rates. In case of treasury bonds, they have coupon rates that are close to the interest rates prevailing in the market. They normally have an inverse relationship, because when the rate of interest goes up, the return on such investment goes down. As the rates changes, a coupon rate that is fixed attracts fewer investors who are ready to pay more or less for the same. These investors generally compare the returns they could have received from current investments and what they could receive from investing somewhere else in the market (Laopodis , 2012). This shows that the rate if interest rates prevailing in the market influences the returns an investor will receive from investing in such bonds.
Conclusion
There are different types of mutual funds and depend on the kind of selection made by the investor. Every mutual fund has different risks and returns and the higher the risk potential the higher return potential. Interest rates are inversely related to rates of returns in stock market.
References
Madura, Jeff. (2016).Financial Markets and Institutions. Cengage Learning.
Laopodis , N.(2012).Understanding Investments: Theories and Strategies. RoutledgeU.S. SECURITIES AND EXCHANGE COMMISSION(n.d). Mutual Funds and Exchange-
Traded Funds (ETFs). Retrieved from: https://www.sec.gov/investor/pubs/sec-guide-to-mutual-funds.pdf
