Share Fund Types
Including stock mutual fund types
There are many different types of share fund types. Some such as balanced mutual funds contain a mix of share and bond investments, typically 60% to 40$.
The discussion below focusses on 'pure' share fund or stock mutual fund types, but the distinction between them may be somewhat artificial. The terms tend to be used by fund managers for marketing purposes.
- Growth funds have as their goal capital growth, but are happy to get some dividend income. These funds buy shares in companies that are growing rapidly but are probably not going to go out of business too quickly.
Whereas with more aggressive growth funds dividend income is neglected. These funds buy shares in companies that have the potential for explosive growth. Of course such shares may also implode so these funds tend to have high price volatility.
Growth and Income funds generate some income. These funds buy shares in companies that have modest prospect for growth and pay good dividend yields.
- Imputation funds predominantly invest in companies that pay franked dividends and offer potential for solid capital growth over the longer term.
- Sector funds invest in a specific industry (e.g., resources). These funds allow the small investor to invest in a highly select industry. The funds usually aim for growth.
- Single-sector share funds include funds investing in only Australian shares or international shares. Some single sector share fund types also specialise within a sector, for example small-companies funds, international resources funds and geared share funds.
- Mutual funds for children provide a similar choice of fund types and operate in a similar manner. Differences only relate to the age of the investors, the low investment amounts and the tax treatment.
- Bear mutual funds, or short funds, come in two different forms. One is an actively managed fund and the other is an inverse-index fund that shorts entire indexes. Both types of bear funds are positioned to make money only when the market is going down. Bear funds are considered an aggressive approach to investing.
Another way of categorizing share fund types is by the size of the companies they invest in, as measured by their market capitalization (market cap).
The three main categories include ...
Small-cap share funds buy shares of small companies. The stock prices for these companies tend to be more volatile, and dividends may not always be present. You may also find funds called micro cap, which invest in the smallest of listed companies.
Mid-cap share funds buy shares of medium-size companies. The stock prices for these companies are less volatile than the small-cap companies, but more volatile (and with greater potential for growth) than the large-cap companies.
Large-cap share funds buy shares of big companies. The stock prices for these companies tend to be relatively stable (but don't think Enron), and the companies may pay a decent dividend.
I tend to mainly ignore these share-fund labels as they are somewhat artificial. However, they do provide some guide as to what you may be in for if you invest in one or more of them.
A fund type that I do invest in that is not mentioned above is the absolute return fund. The managers of this type of fund see themselves as 'stock pickers' rather than 'index huggers'. They look for stocks that are undervalued and invest in them until they judge them to be over-valued.
Alternatively, they may short sell shares that appear over-valued with the aim to make money if and when their price drops to, or below, fair value.
So they tend to make more money in market down-turns than other funds who don't short sell.
Their aim is to maximise returns, irrespective of the sector, or the size of the company, or anything else that defines the various types of funds categorised above.
Their philosophy seems to encapsulate what I think share investing is all about - producing the best possible return irespective of market conditions - or what the herd is up to.
So there is a wide variety of choice in selecting mutual funds or share fund types. I try to choose funds that are not too big, as performance is difficult to maintain as size increases.
I also keep an eye on management expense ratios (MERs) as small increases can have a significant effect on returns.
Return from Share Fund Types to Managed Share Funds
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