Mutual Fund Primer: Don’t Invest Till You Learn the Basics

Welcome to MutualFunds.com

Please help us personalize your experience and select the one that best describes you.

Your personalized experience is almost ready.

Join other Individual Investors receiving FREE personalized market updates and research. Join other Institutional Investors receiving FREE personalized market updates and research. Join other Financial Advisors receiving FREE personalized market updates and research.

Thank you!

Check your email and confirm your subscription to complete your personalized experience.

Thank you for your submission

We hope you enjoy your experience

Channels

Fixed income news, reports, video and more.

Municipal bonds news, reports, video and more.

Practice management news, reports, video and more.

Portfolio management news, reports, video and more.

Retirement news, reports, video and more.

Learn from industry thought leaders and expert market participants.

Deepen your understanding of Responsible Investing and learn how it can potentially help you build a more successful practice.

Advisors

Receive email updates about fund flows, news, upcoming CE accredited webcasts from industry thought leaders and more.

Content focused on helping financial advisors build successful client relationships and grow their business.

Content geared towards helping financial advisors build better client portfolios.

Get insights on the industry trends and investment news from leading fund managers and experts.

Mutual Fund Primer: Don’t Invest Till You Learn the Basics

Glasses on stock analysis and graph
Mutual funds give investors access to some of the brightest minds in finance. There are three major investment groups in mutual funds and within these groups there are two dominant strategies. Understanding the driving logic behind these strategies will allow you to make better investment decisions when selecting a mutual fund.

Styles of Mutual Fund

There are three major groups of mutual funds and within these groups there are different investment strategies. Understanding the right investment choice for you means understanding the possibilities.

1. Equity (stocks): These funds buy stocks, which are small ownership pieces of companies. While equity funds are considered the riskiest of the three major mutual fund groups, they also have historically outperformed the other two groups.

2. Fixed-Income (bonds): These funds invest in income-producing investments such as bonds, preferred shares and mortgages. These are issued from companies or governments who wish to raise money and pay back investors over time. While usually less risky than equity, there can still be sizable risk due to the possibility of a default.

3. Money Market: Short-term bonds or callable cash. These are usually low-duration treasury bonds. The investment pays very little, but has maximum liquidity and safety.

As a note, there are mutual funds that attempt to blend two or three of these groupings together into one investment strategy. The “balanced” fund is a popular example; it’s a 60% equity and 40% fixed-income investment strategy.

Within these three groups of assets there are different investment strategies that are employed to secure profits. The two major strategies are outlined below. Many professional mutual fund managers employ more complex forms of these strategies, so it is always wise to read the prospectus. The prospectus of a fund is a document outlining the strategy’s details and sometimes it’s driving logic.

Types of Investment Strategies

Value:

Value investors scour the markets for companies or bonds that are out of favor with the market. The company’s asset value is depressed because the market doesn’t like its current cash flow, or perhaps an adverse news event has shocked the world and is related to the asset’s cash flow. This is where the value investors step in. They spend their time looking at cold hard cash flows and asset values. When the current asset price goes below what the value investor believes to be the liquidation value of the asset, they start to buy. The value investor buys because he or she believes that even if the worst-case scenario occurs, they’ll still make a tidy profit. To a value investor, adverse company news looks like a flashing neon sign saying “Clearance 50% Off! Everything Must Go!” Being smart shoppers, they buy when others are selling.

Key Value Metrics:

  • P/E Ratio
  • Revenue Generation
  • Price-to-book Ratios

Value Mutual Funds:

  • Vanguard Equity Income Fund (VEIPX)
  • Invesco Diversified Dividend Fund (LCEAX)
  • Strategic Advisers Value Fund (FVSAX)
Growth:

Growth funds are usually riskier than value funds, however, they also have larger return potential. Growth investors are looking for a rapid expansion of the asset’s value in the market because of increasing fundamental signals. Like value investing, growth investing is also trying to find assets that are “on sale,” based on the continued expansion of cash flows coming from the asset. As the fundamentals continue to improve, the profits are reaped from the liquidation of positions whose fundamental indicators have slowed down.

Key Growth Metrics:

  • Earnings Growth
  • Return-on-Equity
  • Profit Margins

Growth Mutual Funds:

  • T.Rowe Price Institutional Large Cap Core Growth Fund (TPLGX)
  • Fidelity Growth Company Fund (FDGRX)
  • Vanguard PrimeCap Fund (VPMCX)

The Bottom Line

In conclusion, mutual funds offer a flexible approach to professionally manage portfolios. Investors simply select the asset type, equity, fixed-income, or money market and then the strategy type, growth or value. By making these choices ahead of time, it is easier to understand the risks and rewards for each investment.
Image courtesy of Pong at FreeDigitalPhotos.net

Sign up for Advisor Access

Receive email updates about best performers, news, CE accredited webcasts and more.

Popular Articles

Download our free report

Find out why $30 trillon is invested in mutual funds.

Why 30 trillion is invested in mutual funds book

Why 30 trillion is invested in mutual funds book

Download our free report

Find out why $30 trillon is invested in mutual funds.

Why 30 trillion is invested in mutual funds book

Download our free report

Find out why $30 trillon is invested in mutual funds.


Read Next

Glasses on stock analysis and graph

Mutual Fund Primer: Don’t Invest Till You Learn the Basics

Mutual funds give investors access to some of the brightest minds in finance. There are three major investment groups in mutual funds and within these groups there are two dominant strategies. Understanding the driving logic behind these strategies will allow you to make better investment decisions when selecting a mutual fund.

Styles of Mutual Fund

There are three major groups of mutual funds and within these groups there are different investment strategies. Understanding the right investment choice for you means understanding the possibilities.

1. Equity (stocks): These funds buy stocks, which are small ownership pieces of companies. While equity funds are considered the riskiest of the three major mutual fund groups, they also have historically outperformed the other two groups.

2. Fixed-Income (bonds): These funds invest in income-producing investments such as bonds, preferred shares and mortgages. These are issued from companies or governments who wish to raise money and pay back investors over time. While usually less risky than equity, there can still be sizable risk due to the possibility of a default.

3. Money Market: Short-term bonds or callable cash. These are usually low-duration treasury bonds. The investment pays very little, but has maximum liquidity and safety.

As a note, there are mutual funds that attempt to blend two or three of these groupings together into one investment strategy. The “balanced” fund is a popular example; it’s a 60% equity and 40% fixed-income investment strategy.

Within these three groups of assets there are different investment strategies that are employed to secure profits. The two major strategies are outlined below. Many professional mutual fund managers employ more complex forms of these strategies, so it is always wise to read the prospectus. The prospectus of a fund is a document outlining the strategy’s details and sometimes it’s driving logic.

Types of Investment Strategies

Value:

Value investors scour the markets for companies or bonds that are out of favor with the market. The company’s asset value is depressed because the market doesn’t like its current cash flow, or perhaps an adverse news event has shocked the world and is related to the asset’s cash flow. This is where the value investors step in. They spend their time looking at cold hard cash flows and asset values. When the current asset price goes below what the value investor believes to be the liquidation value of the asset, they start to buy. The value investor buys because he or she believes that even if the worst-case scenario occurs, they’ll still make a tidy profit. To a value investor, adverse company news looks like a flashing neon sign saying “Clearance 50% Off! Everything Must Go!” Being smart shoppers, they buy when others are selling.

Key Value Metrics:

  • P/E Ratio
  • Revenue Generation
  • Price-to-book Ratios

Value Mutual Funds:

  • Vanguard Equity Income Fund (VEIPX)
  • Invesco Diversified Dividend Fund (LCEAX)
  • Strategic Advisers Value Fund (FVSAX)
Growth:

Growth funds are usually riskier than value funds, however, they also have larger return potential. Growth investors are looking for a rapid expansion of the asset’s value in the market because of increasing fundamental signals. Like value investing, growth investing is also trying to find assets that are “on sale,” based on the continued expansion of cash flows coming from the asset. As the fundamentals continue to improve, the profits are reaped from the liquidation of positions whose fundamental indicators have slowed down.

Key Growth Metrics:

  • Earnings Growth
  • Return-on-Equity
  • Profit Margins

Growth Mutual Funds:

  • T.Rowe Price Institutional Large Cap Core Growth Fund (TPLGX)
  • Fidelity Growth Company Fund (FDGRX)
  • Vanguard PrimeCap Fund (VPMCX)

The Bottom Line

In conclusion, mutual funds offer a flexible approach to professionally manage portfolios. Investors simply select the asset type, equity, fixed-income, or money market and then the strategy type, growth or value. By making these choices ahead of time, it is easier to understand the risks and rewards for each investment.
Image courtesy of Pong at FreeDigitalPhotos.net

Sign up for Advisor Access

Receive email updates about best performers, news, CE accredited webcasts and more.

Popular Articles

Download our free report

Find out why $30 trillon is invested in mutual funds.

Why 30 trillion is invested in mutual funds book

Why 30 trillion is invested in mutual funds book

Download our free report

Find out why $30 trillon is invested in mutual funds.

Why 30 trillion is invested in mutual funds book

Download our free report

Find out why $30 trillon is invested in mutual funds.


Read Next