Types of Mutual Fund

Learn the Types before Investing in Mutual Funds

There is no one method of classifying mutual funds risk free or advantageous. However we can do the same by way of classifying mutual funds as per their functioning and the type of funds they offer to investors. This article makes you aware on:

-What are the reasons that make the close ended mutual finds more attractive?
-What are the factors that determine the prices of exchange traded funds?
-Find out the features of open ended mutual funds

There is no one method of classifying mutual funds risk free or advantageous. However we can do the same by way of classifying mutual funds as per their functioning and the type of funds they offer to investors. If we took the middle path and classify broadly we get the following list.

Open End Mutual Funds

All mutual funds by default and by definition are open end funds. Here an investor can buy the shares at any point of time and exit from it at any time of his choice. Both buying and selling will be at the current NAV subject to load factors where ever applicable. Though this is a very broad category, one can easily say this is the most popular of the lot looking at the ease with which one can liquidate his holding (exit from position by selling or redemption to the trust/fund). Affordability is another key factor that decides the popularity of open end funds. Those who can not afford high initial prices can buy with low dollar values and even on a monthly basis.

Closed End Mutual Funds

Selling off of a specified and limited number of shares by the mutual funds at an initial public offering is known as closed end mutual fund. However one important difference between open end fund and closed end mutual fund is that the price of the latter is decided by demand and supply of the stock in the market and not by NAVs unlike in the former case. The pooled funds are utilized as per the mandate of the fund and Securities and Exchange Commission's regulations. They are traded more like the general stocks. Some of the reasons to invest in this category
Prices are determined by market demands and thus closed end funds trade at lower than the offer price more often than not which is a perfect time for buying (at discounted prices)

Like in the open end funds there are wide options for you to choose from. Like stock funds, balanced funds that give full asset allocation benefit and thirdly the bond funds.

Exchange Traded Funds

The Exchange Traded Funds are a basket of stocks and trade like a normal security on exchanges tracking index much like index funds. The prices of the ETFs are determined by market forces and thus no NAVs can be fixed. The advantages of ETFs include buying and selling like you can do with any stock traded on the exchange not excluding short selling while you enjoy the diversification of an index fund. There no fees/loads on these funds other than the commission you pay to the broker. There are many popular funds in this class and one of them is SPDR that tracks S&P 500 index.