Market Beat: Types of mutual funds
One of the best ways that investors can manage risk is through diversification. Mutual funds are a good way for investors to achieve broad diversification of their assets.
The very first mutual funds were used hundreds of years ago as early as the late 1700s. Modern type mutual funds didn’t appear until the late 1920s. The Massachusetts Investors Trust was the first of the modern mutual funds, it was started in 1924 and opened to investors in 1928.
Since their beginning mutual funds have evolved considerably to the benefit of investors. The early mutual funds had high fees and commissions. Today there are many types of funds and some of them have no commissions and very low or even non-existent fees.
Open end funds can increase or decrease their number of shares based on investor demand. They are priced at their NAV or net asset value and if you buy or sell, you’ll get the NAV price at the end of the day.
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Closed end funds have a set number of shares and will trade on an exchange through out the trading day. They will either trade at a premium or a discount to their NAV. Most mutual funds are of the open-end type.
Exchange traded funds have been around since the mid 1990s and have become increasingly popular over the years. They are open end in the sense that more shares can be created to meet demand and they trade on an exchange throughout the day just like a stock.
There are exchange traded funds, ETFs and exchange traded notes, ETNs. Exchange traded funds are backed by their underlying investments and exchange traded notes are backed by the issuing bank. An exchange traded fund that represents a broad-based stock index will hold the shares in the individual stocks that make up the index. An exchange traded note that represents a commodity, may just hold futures contracts on the underlying commodity. There are precious metals funds that actually own the metal and don’t use futures contracts.
Two other major types of funds are passive and active. Passive funds will represent an index and only make changes if there are changes to the index that the fund represents. Active funds have a manager that selects which investments to make. Typically, passive funds have less turnover and lower expenses than active funds. Mutual funds make it possible to diversify even a relatively small amount of money.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.
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