Question

4. Provide an example of how to classify mutual funds according to investment style.

Answer 1

Classification of Mutual Funds according to investment style-

Suppose, a person wanted to invest $1,000 in mutual funds. He went to the fund manager for effective investment. Fund manager will first check the need and purpose of investment. Whether investor wants high return, moderate or secured return and his fees will vary depending on the nature of returns. Thus, investing style can be categorized as follows:

1. Index Based Funds or Passively Managed Funds: Index Based Funds seeks to achieve interest based on the underlying securities Index. Fund manager usually charge low fees for the investment as he generally invest in the component securities of the index. Return of the fund usually vary and/or based on the performance of the Index. Index based fund investment is usually passive in nature and requires least efforts to manage it.

2. Actively Managed Fund: Fund manager usually invest in the securities of the portfolio on the daily basis and are less concerned to the the index performance. They usually watch over the companies performance and investments are moreover based on the technical analysis of the securities. Fund manager usually charge high fees for these type if investments. In these trades must be consistent as there is no underlying index references.

3. Leveraged and inverse leveraged ETFs: Here, it seeks to achieve daily return in the multiple return of the securities index. These type of investing style usually seeks to fulfill daily objectives of investment. These ETFs usually adopt the short sales, futures, swaps techniques to achieve their daily goals.