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classification of Funds  

The mutual funds were first established in Europe. The stock markets got crashed in 1929, after that the Congress has passed a few acts regulating the securities markets and mutual funds. The Securities Act of 1933 requires that all investments sold to the public, including mutual funds, must be registered with the Securities and Exchange Commission. The Revenue Act of 1936 has established the guidelines for the taxation of mutual funds. The Investment Company Act of 1940 governs the structure of mutual funds.

Types

These are mainly classified into three types:

a) Open ended;

b) Unit investment trust; and

c) Closed ended funds.

Open ended:

These funds has to be brought back from their investors at the end of every business day at the net asset value (NAV).

Closed ended:

These funds issue shares to the public only once. These shares are offered to them during the Initial public offering (IPO).

Classification

These are broadly classified into four categories:

a) Money market;

b) Bond or fixed income;

c) Stock or equity; and

d) Hybrid funds.

Money Market Funds

These are invested directly in money market instruments. These are called as fixed income securities. These have a very short time towards maturity. These have very high credit quality. Investors can use money market funds as a substitute for bank savings accounts

Bond Funds:

These are invested in fixed income funds or debt securities.

These are classified into four types:

a) high yield bonds;

b) investment grade corporate bonds;

c) government bonds or municipal bonds; and

d) short-term, intermediate, or long term bonds.

Equity Funds:

These are classified into two dimensions they are:

a) Market capitalization; and

b) Investment style growth vs. blend/core vs. value.

Market capitalizations are typically divided into the four categories:

1) Micro cap,

2) Small cap,

3) Mid cap, and

4) Large cap.

Hybrid Funds:

These can be invested in bond markets and stock markets also.

These are mainly divided into the three types:

a) Balanced funds;

b) Asset allocation funds; and

c) Lifecycle or Lifestyle funds

Advantages

a) These have increased diversification;

b) It has high volatility and liquidity;

c) These have government oversight; and

d) The losses are minimized to a great extent.

Disadvantages

a) It has entry loads and exit loads

b) The gains are minimized

c) It does not provide the opportunity to customize the portfolio