Mutual Funds Types and Themes

A great advantage of mutual fund investing is that the managers have knowledge and expertise that can be applied to generate a better rate of return.  As part of utilising the expertise to the best of their ability mutual funds are often set up with a certain theme or sector of focus. This helps you capture market opportunities within a smaller subset of investments.

1. Country Theme (United States, Europe, China, Emerging Markets)

China has achieved rapid growth over the past decade and this has made China focussed mutual funds very popular. If you want an effective tool to invest in China a mutual fund can get you access to the market without the hassle of having to buy into the market directly yourself – through buying Chinese stocks and bonds which can get expensive in transaction fees and management time.

An example of a currently popular China Mutual Fund is the Fidelity Advisor China Region A (FHKAX). The goal of this fund is capital appreciation over the long run and it invests in a broad range of companies based in Greater China. The fund invests a maximum of 35% of its value in industries that account for over 20% of the Hong Kong, Taiwanese and the Chinese market and returned 3.3% in the last one year period. The managers focus on local market conditions and economic indicators when making their investment selections.

2. Income Theme

An income theme fund is a good choice if your goal is to receive a regular income stream from your investment – such as monthly or quarterly paid returns. Income funds usually hold a variety of government, municipal and corporate bonds, dividend-paying stocks as well as a mix of other instruments.

Normally, the bonds in these portfolios are investment grade and the other securities are of high credit quality. This is to help protect your initial investment whilst also generating income. A good example is the Vanguard Managed Payout Investor (VPGDX) Fund which pays monthly distributions to investors. The fund has a maximum stock allocation proportion of around 75% and has a 5-year return of 10.8%. However, the minimum initial purchase amount is very high at $25,000.

3. Real Estate Theme

Real estate funds invest in real-estate investment trusts (REITs) mostly. REITs are companies that develop and manage real estate properties. Some funds in this category also invest in real-estate operating businesses.

An example is the Fidelity Series Real Estate Equity Fund which invests 99% of the portfolio in equities of property companies. The fund had a management fee of 0.55% over the past year to give an indication to new investors. The goal of the fund is above-average return that beats the yield of the S&P 500 Index whilst also keeping risks within a manageable level. The fund invests at least 80% of its value in equity securities of companies principally engaged in the real estate industry and other real estate related investments and includes both domestic and foreign issuers. The fund managers use fundamental analysis of each company whilst also looking at market and economic conditions to select investments.

Whichever mutual fund investment you select make sure you do your research beforehand to fully understand the risks and costs involved and to check if the fund will help you meet your financial goals.