Mutual Fund Groups: What Are They Called?

A mutual fund is an investment fund that pools money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities. They are often classified by their principal investments, such as money market funds, bond or fixed-income funds, stock or equity funds, or hybrid funds. The advantages of mutual funds include diversification, liquidity, and professional management.

A group of mutual funds for investing is called a fund family or fund complex. Funds that are managed by the same company under the same brand are known as a fund family.

Open-end funds

A group of mutual funds for investing is called an open-end fund. Open-end funds are collective investment schemes that can issue and redeem shares at any time. They are available in most developed countries, including the US, the UK, and Europe, but the terminology and operating rules vary across regions.

Most open-end funds are actively managed, meaning that a portfolio manager picks the securities to buy. However, index funds, which are passive investment strategies that aim to replicate an index like the S&P 500, are growing in popularity.

There are various fees associated with open-end funds, such as initial charges, front-end loads, close-end loads, and 12b-1 fees, which cover the cost of distributing the fund by paying commissions to advisers or brokers. These fees can impact the overall returns of investors.

Closed-end funds

A closed-end fund is an investment structure, not an asset class. It is one of three SEC-recognised types of investment companies, alongside mutual funds and unit investment trusts.

A closed-end fund is not a traditional mutual fund that is closed to new investors. Instead, it is closed in the sense that capital does not regularly flow into or out of the fund when investors buy or sell shares.

• A closed-end fund holds an IPO at launch, and the money raised is used by portfolio managers to buy securities.
• After the IPO, shares are traded on an exchange, and other market participants act as the corresponding buyers or sellers.
• The fund itself does not issue or redeem shares daily.
• The share price of a closed-end fund is almost always different from its net asset value.
• Closed-end funds can invest in illiquid securities and can issue debt and/or preferred shares.
• Closed-end funds are subject to management fees and other expenses.
• Closed-end funds may trade at a discount or premium to their net asset value and are subject to the market fluctuations of their underlying investments.
• Closed-end funds are registered with the SEC and subject to SEC regulation.

There are only five ways to increase capital within a closed-end fund:

• Making sound investment choices that appreciate and thus increase the net asset value.
• Issuing debt, thereby leveraging the fund.
• Issuing preferred shares, thereby leveraging the fund.
• Conducting a secondary share offering (selling new shares to the public).
• Conducting a rights offering (giving existing shareholders the right to invest more capital into the fund in proportion to their existing ownership).

Similarly, there are only five ways capital can flow out of a closed-end fund:

• Distributions to shareholders.
• Poor investment decisions.
• A tender offer to repurchase shares, which is a method to control discounts.
• For leveraged funds only, forced sales to remain in compliance with leverage limits.
• The liquidation of the fund.

Unit investment trusts

A unit investment trust (UIT) is an investment company that offers a fixed portfolio of stocks and bonds to investors as redeemable units for a specific period. UITs are similar to both open-ended and closed-end mutual funds in that they all consist of collective investments where many investors combine their funds to be managed by a portfolio manager.

Like open-ended mutual funds, UITs are bought and sold directly from the company that issues them, although they can sometimes be bought on the secondary market. Like closed-end funds, UITs are issued via an initial public offering (IPO).

A UIT is a US financial company that buys or holds a group of securities, such as stocks or bonds, and makes them available to investors as redeemable units. They are defined as investment companies, along with mutual funds and closed-end funds.

A UIT pools money from multiple investors to purchase a fixed portfolio of securities, such as stocks or bonds. Once the trust is created, investors purchase units that represent a proportional ownership interest in the underlying assets. The trust is then managed, and income is distributed over the life of the assets.

The main benefit of a UIT is its simplicity. Because it is a passive investment with a defined strategy, the assets of a UIT are usually not sold prior to maturity once they are purchased. Therefore, investors like the straightforward nature of knowing exactly what securities will be held, what timeline is being managed, and what risks are being recognised.

The main benefit of a UIT can also be its greatest downside. Because the assets are not frequently bought or sold, investments often lock into an investment plan that is not changed. The assets may not be re-evaluated as they are being held, and investors may lose money.

UITs vs Mutual Funds

Mutual funds are open-ended funds, meaning the portfolio manager can buy and sell securities in the portfolio. Meanwhile, a UIT pays interest income on the bonds and holds the portfolio until a specific end date when the bonds are sold and the principal amount is returned to the owners.

Many investors prefer to use mutual funds for stock investing so that the portfolio can be traded. If an investor is interested in buying and holding a portfolio of bonds and earning interest, they may purchase a UIT or closed-end fund with a fixed portfolio.

The investment objective of each mutual fund is to outperform a particular benchmark, and the portfolio manager trades securities to meet that objective. A stock mutual fund, for example, may have an objective to outperform the Standard & Poor's 500 index of large-cap stocks. Meanwhile, UITs are not actively managed. Assets are purchased upfront, then those assets are held for the duration of the UIT.

Advantages and Disadvantages of UITs

UITs provide investors with access to a diversified portfolio of securities, which can help reduce the risk of losses due to any single security's underperformance. However, some UITs are industry-specific (e.g. 100% invested in healthcare) and these UITs hold greater risk.

UITs are required to disclose their portfolios regularly, providing investors with greater transparency into their holdings and investment strategy. In addition, UITs are generally passive investments, which means they do not involve active management or frequent trading, resulting in lower fees and expenses compared to actively managed funds.

UITs also often have low minimum investment requirements, making them accessible to a wider range of investors. More investors may also appreciate the simplicity of a UIT. UITs have a fixed portfolio of securities and a set investment strategy, meaning their performance is usually more predictable than actively managed funds that may change their holdings and investment strategy over time.

However, because UITs have a fixed portfolio of securities and a set investment strategy, investors have little control over the investments made by the trust. In some cases, poor performers are retained, and sponsors usually maintain UIT assets without trading away or changing strategy.

UITs are designed to be long-term investments, so they may not be appropriate for investors who need access to their funds on short notice. UITs are also not traded on exchanges like mutual funds and may incur fees upfront, so investors may have difficulty buying or selling units or must be prepared to incur higher costs when purchasing the investment.

In some cases, UITs may not provide as much information about their investment strategy or performance as other types of investments. This includes not having as much transparency around fees, expenses, or future plans for changes in assets.

Stock funds

A group of mutual funds for investing is called a portfolio of mutual funds. Now, let's focus on stock funds.

Index funds, a type of stock fund, invest in securities to replicate the performance of an underlying index. For example, an S&P 500 index fund will buy and sell stocks to match the composition of the S&P 500 index. As a result, an index fund's performance closely tracks the index it is based on, and it generally has lower management costs than other types of funds.

Growth funds, another type of stock fund, focus on investing in rapidly growing companies that tend to reinvest their profits for research and development instead of paying dividends. On the other hand, value funds invest in "value" stocks, which are typically older, established companies that pay dividends.

Sector funds are stock funds that invest in a specific area of industry, such as gold mining, technology, or utilities. These funds offer high appreciation potential but may also pose higher risks.

Equity income funds prioritise current income over growth by investing in stocks with long histories of dividend payments. Balanced funds, meanwhile, invest in both stocks for appreciation and bonds for income, aiming to provide a regular income payment along with principal growth.

Asset allocation funds are considered a type of stock fund as they own stocks and a substantial amount of other assets. These funds split their investments between growth stocks, income stocks/bonds, and money market instruments or cash to maintain stability. Tactical allocation funds, a type of asset allocation fund, switch between asset classes based on predictions of future returns, while other funds maintain a constant proportion of assets due to the unreliable nature of such predictions.

Bond funds

A group of mutual funds for investing is called a bond fund.

A bond fund is a mutual fund or an exchange-traded fund (ETF) that buys and sells debt instruments like government and corporate bonds. The primary goal of a bond fund is to generate monthly income for investors. Bond funds are an alternative to buying individual bonds. The investor in a bond fund is buying shares in a fund that buys and sells many bonds. Typically, a bond fund manager buys and sells according to market conditions and rarely holds bonds until maturity.

A bond fund invests primarily in a portfolio of fixed-income securities such as municipal and corporate bonds. Bond funds provide diversification for investors for a low required minimum investment.

Due to the inverse relationship between interest rates and bond prices, a long-term bond has greater interest rate risk than a short-term bond.

For many investors, a bond fund is a more efficient way of investing than buying individual bond securities. Unlike individual bond securities, bond funds do not have a maturity date for the repayment of principal, so the principal amount invested may fluctuate from time to time.

Investors in bond funds receive monthly payments that reflect the mix of all the bonds in the fund, which means that the interest income payment will vary monthly.

Bonds are rated according to the degree of risk that their issuers will default on their debts. An "AAA" or "AA" bond is issued by a company or government that is highly unlikely to default. An "F" bond is on the edge.

Most bond funds are comprised of a certain type of bond, such as corporate or government bonds. They also focus on a time to maturity, such as short-term, intermediate-term, and long-term.

• US government bond funds
• Municipal bond funds
• Corporate bond funds
• Mortgage-backed securities (MBS) funds
• High-yield bond funds
• Emerging market bond funds
• Global bond funds

Frequently asked questions