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Unit 9: Mutual Funds

Socially responsible: This fund would invests according to non-economic guidelines. Funds Notes
may make investments based on such issues as environmental responsibility, human rights, or
religious views. For example, socially responsible funds may take a proactive stance by selectively
investing in environmentally-friendly companies or firms with good employee relations.
Therefore the fund would avoid securities from firms who profit from alcohol, tobacco, gambling,
pornography etc.
Balanced funds: The investor may wish to balance his risk between various sectors such as asset
size, income or growth. Therefore the fund is a balance between various attributes desired.
Tax efficient: Aims to minimize tax bills, such as keeping turnover levels low or shying away
from companies that provide dividends, which are regular payouts in cash or stock that are
taxable in the year that they are received. These funds still shoot for solid returns; they just want
less of them showing up on the tax returns.
Convertible: Bonds or Preferred stock which may be converted into common stock.

Junk bond: Bonds which pay higher that market interest, but carry higher risk for failure and are
rated below AAA.
Mutual funds of mutual funds: This funds that specializes in buying shares in other mutual
funds rather than individual securities.
Open ended: A type of mutual fund that does not have restrictions on the amount of shares the
fund will issue. If demand is high enough, the fund will continue to issue shares no matter how
many investors there are. Open-end funds also buy back shares when investors wish to sell.
Closed ended: This fund has a fixed number of shares. The value of the shares fluctuates with the
market, but fund manager has less influence because the price of the underlining owned securities
has greater influence.
Exchange traded funds (ETFs): Baskets of securities (stocks or bonds) that track highly recognized
indexes. Similar to mutual funds, except that they trade the same way that a stock trades, on a
stock exchange.

9.3 Significance of Mutual Funds

Mutual funds have emerged as the best in terms of variety, flexibility, diversification, liquidity
as well as tax benefits. Besides, through MFs investors can gain access to investment opportunities
that would otherwise be unavailable to them due to limited knowledge and resources.
MFs have the capability to provide solutions to most investors' needs, however, the key is to do
proper selections and have a process for monitoring.

1. Diversification: The best mutual funds design their portfolios so individual investments
will react differently to the same economic conditions. For example, economic conditions
like a rise in interest rates may cause certain securities in a diversified portfolio to decrease
in value. Other securities in the portfolio will respond to the same economic conditions by
increasing in value. When a portfolio is balanced in this way, the value of the overall
portfolio should gradually increase over time, even if some securities lose value.
2. Professional management: Most mutual funds pay topflight professionals to manage their
investments. These managers decide what securities the fund will buy and sell.
3. Regulatory oversight: Mutual funds are subject to many government regulations that
protect investors from fraud.
4. Liquidity: It's easy to get your money out of a mutual fund. Write a check, make a call, and
you've got the cash.

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