Mutual funds often have impressive names, which confuse or scare novice investors rather than help them. A fancy but incomprehensible name is something very different from a solid investment, which is based on your financial goals.
A selection of the available mutual funds yields some impressive names: multi-asset funds, absolute return funds, unconstrained funds, outcome funds, life cycle funds, click funds, hedge funds, impact funds, growth funds and funds of funds. It feels like the marketers are trying to make investing as difficult as possible.
We from Globaltrader24 see it as our sacred duty to explain and inform our readers about the marketing jargon and name things as they are. That is why we are launching a new series in which we understandably explain complex fund labels. This way you will learn to better assess the different mutual funds, not on their names, but on their financial value.
We kick off the series with the multi-asset fund, commonly known as a mixed fund. That’s is not very smart, because multi-asset is an umbrella term for a variety of funds with all sorts of exotic titles. These funds however have one thing in common, which will very much appeal to wise investors: they diversify among multiple types of asset classes, and therefore score well on the combination of risk sensitivity and return.
In short, there are two types of mixed funds. The classic mixed fund, which invests in a fixed amount of individual stocks and bonds, or active mutual funds and increasingly also in ETFs. The allocation between equities, bonds, cash and other investments determines the risk profile of the fund: from defensive, neutral, to offensive. In general, you can say: the higher the component of shares of the fund, the higher the risk of the fund as a whole. And the higher the cash component, the lower the risk.
A category which is booming is the mixed fund, which does not allocate its assets based on a permanent division among categories, but instead invests worldwide in every imaginable category. They basically invest based on many different strategies, without taking more risk than was agreed upon. This flexible and unconstrained way of investing is referred to by different names in the marketing manual: unconstrained investing, go-anywhere investing or dynamic investing.
Mixed funds and diversification
Mixed funds can be seen as a solution for people who do not know where they should invest in. They have become increasingly popular during recent years. Mixed funds do the time-consuming and hard work for you by putting together and maintaining a balanced investment portfolio.
Instead of individually selecting and investigating which asset classes offer the best investment opportunities, mixed funds spread their investments across several types of investment, styles, sectors and regions. Stocks and bonds are always the most important categories for mixed funds, but there is also room for cash, real estate, commodities and other alternative investments.
The idea behind diversifying your investment portfolio is that it offers the best protection against loss of value. Every investment reacts differently to market changes. Bonds issued by countries decline in value when interest rates rise, but bank shares will probably rise in value because banks see their interest income increase. Diversification is sometimes called the only free lunch in investing, because it is the only way to reduce risk for the same expected return.
Within the investment categories, a mixed fund manager has to make all kinds of considerations as well. He can select stocks of large, medium or small businesses; shares of impetuous growing companies or those whose earnings grow steadily. He prefers certain sectors such as technology or health care and specific regions such as Europe, Asia, US, and emerging markets. For bonds, the interest rate sensitivity, duration, region, credit rating and currency play an important role in the selection process.
An important point to consider is the cost charged by mixed funds to investors. They can be rather high, and this comes at the expense of your return. The average compensation charged by mixed funds is 1.18%, according to Morningstar. The more these classic mixed funds invest in equities, the higher the cost. The new generation mixed funds requires a slightly higher fee, an average of 1.31% of the deposit.
Mixed funds, like any other investment, are not without risk. The value of investments may fluctuate for various reasons. For example, there is equity risk, interest rate risk, credit risk, fund of fund risk if you simultaneously invest in several funds, foreign exchange risk, index risk, inflation risk, and derivatives risk when derivatives are used as part of the investment strategy.