Posted on Leave a comment

Characteristics Of Mutual Funds – Mutual Fund Analysis

  •   
  •   
  •   
  •   
  •   
  •   
  •  

Introduction

 

 

There are thousands of mutual funds available to investors today, from funds that invest in remote countries, to funds that focus on commodities and everything in between. Chances are that if you can dream up an investment strategy, there’s probably a mutual fund already doing it. All these choices can be overwhelming, and it can be difficult to find a mutual fund that meets your needs. In this lesson, we’ll discuss the mutual fund characteristics and analysis needed to help narrow down the universe of mutual funds. We’ll also discuss the common styles of equity mutual funds – as we examine the risks, potential returns, and how you can find a fund that might be right for you.

 

But before we begin, we would like you to read and agree to the Terms & Conditions of this post before you proceed any further.

Disclaimer: Invest In Wall Street is in no way financially or legally responsible for any investing decisions made by any of our readers and are, in turn, acting on their own free will. The information in this article is purely educational and should not be abused or misconstrued in any way, shape, or form.

Mutual Funds Style Analysis

 

Equity mutual funds invest in stocks. Because there are many types of stocks, there are many styles of equity mutual funds.

 

 

A common way to classify different types of stocks is by market capitalization, which is a company’s dollar value.

Stocks are broadly grouped into three market capitalization sizes – small, medium, and large – and are referred to as small-cap, mid-cap, and large-cap.

Small-cap stocks have market capitalization of less than $2 billion (<$2B). Mutual funds that focus on small-cap stocks typically offer the highest risk and return potential.

Mid-cap stocks have market capitalization between $2 and $10 billion ($2-$10B). Mutual funds that focus on mid-cap stocks typically offer slightly lower risk and return potential than small-cap funds.

Large-cap stocks have market capitalization of more than $10 billion (>$10B). Mutual funds that focus on stocks of this size typically offer slightly lower risk and return potential than mid-cap funds.

 

 

Equity mutual funds may focus on one market capitalization, or they may overlap across all three.

In addition to market cap, stocks are grouped by type – namely, growth or value.

Growth stocks are usually younger companies that offer higher risk and return potential than value stocks.

In contrast, value stocks are typically older companies that may be more financially stable and may pay dividends.

Mutual funds focused on growth stocks offer higher risk and return potential than mutual funds focused on value stocks.

Some mutual funds invest in a mix of growth and value stocks. These are known as blend mutual funds, and they may fall between growth and value in terms of risk and return potential.

Investors can get a better idea of the risk and return potential of mutual funds based on the types of stocks that they hold. Small-cap growth funds offer the highest risk and return potential. Mid-cap blend funds are in the middle in terms of risk and return. And large-cap value funds offer the lowest risk and return potential.

Now that you know the common styles of equity mutual funds and their risk return profiles, lets discuss how to find a fund that might fit your needs.

A Mutual Fund To Meet Your Needs

 

 

Finding the right fund should be based on your risk tolerance and time horizon. Investors with a high risk tolerance and longer time horizons might search among small-cap growth or blend funds and mid-cap growth funds, because they offer the highest risk and return potential.

Conversely, investors with low risk tolerance and shorter time horizons might search among large-cap value or growth funds and mid-cap value funds.

Some investors might fall somewhere in the middle, which is when a mid-cap blend fund might be a good fit.

Investors may want to avoid choosing funds that might hold similar stocks. For instance, small-cap value and small-cap blend funds probably hold some of the same stocks. Investing in mutual funds that hold the same stocks could increase risk.

Instead, investors should consider funds that hold different stocks. For example, its unlikely that large-cap value and small-cap growth funds share holdings.

 

 

Investing in these types of funds increases diversification and reduces risk.

Don’t let the universe of mutual funds overwhelm you. Now that you understand the common equity fund styles along with their risk and return potential, finding the right fund for you could be easier than you think.

 

Quick Recap

In Review…..

Characteristics Of Mutual Funds

  • Equity mutual funds invest in stocks. Because there are many types of stocks, there are many styles of equity mutual funds
  • A common way to classify different types of stocks is by market capitalization, which is a company’s dollar value
  • Small-cap stocks have market capitalization of less than $2 billion (< $2B). Mutual funds that focus on small-cap stocks typically offer the highest risk and return potential
  • Mid-cap stocks have market capitalization between $2 and $10 billion ($2-$10B). Mutual funds that focus on mid-cap stocks typically offer slightly lower risk and return potential than small-cap funds
  • Large-cap stocks have market capitalization of more than $10 billion (>$10B). Mutual funds that focus on stocks of this size typically offer slightly lower risk and return potential than mid-cap funds
  • In addition to market cap, stocks are grouped by type – namely, growth or value
  • Growth stocks are usually younger companies that offer higher risk and return potential than value stocks
  • In contrast, value stocks are typically older companies that may be more financially stable and may pay dividends
  • Mutual funds focused on growth stocks offer higher risk and return potential than mutual funds focused on value stocks
  • Some mutual funds invest in a mix of growth and value stocks. These are known as blend mutual funds, and they may fall between growth and value in terms of risk and return potential
  • Investors can get a better idea of the risk and return potential of mutual funds based on the types of stocks that they hold. Small-cap growth funds offer the highest risk and return potential. Mid-cap blend funds are in the middle in terms of risk and return. And large-cap value funds offer the lowest risk and return potential

 

Mutual Fund Analysis

  • Finding the right fund should be based on your risk tolerance and time horizon. Investors with a high risk tolerance and longer time horizons might search among small-cap growth or blend funds and mid-cap growth funds, because they offer the highest risk and return potential
  • Conversely, investors with low risk tolerance and shorter time horizons might search among large-cap value or growth funds and mid-cap value funds
  • Some investors might fall somewhere in the middle, which is when a mid-cap blend fund might be a good fit
  • Investors may want to avoid choosing funds that might hold similar stocks. For instance, small-cap value and small-cap blend funds probably hold some of the same stocks. Investing in mutual funds that hold the same stocks could increase risk
  • Instead, investors should consider funds that hold different stocks. For example, its unlikely that large-cap value and small-cap growth funds share holdings
  • Investing in these types of funds increases diversification and reduces risk

 

 

And these are the common types of mutual funds. We only covered equity-oriented mutual funds, since these are the most common types of mutual funds. You could of course opt to invest in other mutual funds such as the fixed-income mutual funds, which only carries bonds & other fixed income assets, international mutual funds, which monitors top stocks from other countries, index-oriented mutual funds, mutual funds that focus on a particular sector, such as technology and energy. There are even mutual funds that carry both stocks and bonds.

I can not begin to explain the plethora of mutual funds that are available to investors – and once you begin your mutual fund research, you will understand exactly what I’m talking about.

When looking to invest in equity-style mutual funds, they are namely two things that you want to look for. The first classification is their market-cap, which comes in three sizes: small, medium, and large. The small-caps typically offer the highest risk and profit potential, while large-caps offer the lowest risk and profit potential since they are safest and most reliable of the three.

These mutual funds are also classified in terms of growth and value. Growth, like small-caps have a higher risk to reward trade off, while value mutual funds, like-large-caps, have the lowest risk to reward trade off.

You could opt to be somewhere in between – these will typically be your mid-caps or blend mutual funds that have the characteristics of both small/large & growth/value mutual funds.

When choosing to invest in equity mutual funds, you must determine your time horizon, in addition to your own risk tolerance. This will give you an idea of the type of mutual fund investment that is right for you.

And always remember to diversify your mutual funds picks – as most investors have a little bit of everything (small/medium/large caps & growth/value) to minimize risk.

I hope you have enjoyed this post and found the information to be quite useful. If you have any questions or concerns, please feel free to leave them down in the comment thread below and make sure to like and share this post.

  •  
  •  
  •  
  •  
  •  
  •  
  •  
Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.