Understanding Mutual Fund Objectives
An important aspect of a mutual fund's investment objective is the correlation between risk and return. Let's take a look at the basic types of investment objectives and the ways they differ.
Safety Of Capital
A mutual fund that has safety of capital as the investment objective tends to carry less risk and usually a lower return. The type of mutual fund that generally has this type of investment objective is a Money Market mutual fund.
The risk level depends on the type of investments within the portfolio. For example, a pure T-Bill mutual fund tends to be a less risky investment than a fund that primarily invests in short-term corporate notes.
A mutual fund with income as the primary investment objective tends to carry more risk than a Money Market fund, but the return tends to be higher. Both domestic and international bond funds, dividend, and mortgage funds are typical funds that have income as their investment objective.
There are two types of Investment Management Styles used by fixed income investment managers: Spread Trader and Interest Rate Anticipator.
Balanced funds invest in cash, equities and fixed income securities and tend to have an investment objective that falls between Income and Growth. Balanced funds tend to carry more risk than the other funds mentioned earlier due to the equity component.
Mutual funds that have a growth investment objective provide investors with a good hedge against inflation and primarily invest in common stocks and sometimes preferred shares. They are commonly known as Equity funds.
A fund manager's investment style tends to differ from equity fund to equity fund. There are three common equity Investment Management Styles - Top Down, Bottom Up and Blend.
Growth funds tend to provide better returns but they also carry a higher risk than income funds.
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