This module discusses the different types of mutual funds. With the significant increase in the number of mutual funds has come an increase in the number of different types. While there has been progress in classifying funds by investment style, no single standard is used to classify mutual funds by type. Thus, one discussion of mutual funds might recognize 10 types of funds while another discussion might point to 20 or more.

What the labels of different fund types represent is also changing with the industry. In recent years there has been a trend for funds, regardless of type, to expand the boundaries of what is in their portfolios. Fifteen years ago, for example, international stocks were rarely found in U.S. growth fund portfolios, whereas today, some of these stocks or American Depository Receipts (ADRs), which represent international stocks, can be found in them. Likewise, bond funds once normally owned only interest-paying debt securities. Today, some bond funds own some common stocks that can alter the risk/return characteristics of a fund. For these reasons, it is important to review the specific holdings of a fund to more thoroughly understand a fund.

The first part of this module provides details and discusses the types of open-end (mutual) funds, as well as exchange-traded funds, exchange-traded notes, and hedge funds, as these securities have increased in popularity. The module then covers the other general fund classification, closed-end funds. Closed-end funds receive much less publicity than open-end funds and usually sell at a discount to net asset value (NAV) in the marketplace because their prices are determined by supply and demand. This, in itself, provides opportunities for investors who can recognize bargains that other investors miss. The module discusses the characteristics and types of closed-end funds and why these funds sell at discounts or premiums to NAV.

The last part of this module covers sources of information available from a fund itself and starts with how to read a prospectus, which is the offering document for a mutual fund. The prospectus provides full and fair disclosure of information to the investor. Far too often, the prospectus is glanced over-or worse, ignored-because it can be too much reading. Yet the information contained in the prospectus is critical for the investor's decision making. The SEC has taken steps to make the prospectus easier to read by requiring the use of "plain English." In addition, the summary prospectus, which the SEC permits to be used in place of the full statutory prospectus, is covered. The prospectus is not, however, the only source of relevant information provided by the fund. Other important information can be found in the Statement of Additional Information and the fund's annual and semiannual reports. These, too, are discussed in the pages that follow.

Author: Jason G. Hovde, MBA, CFP®

Jason G. Hovde is the investments professor at the College for Financial Planning. Prior to joining the College, Jason had a financial planning/investment advisory practice and was a branch manager for one of the largest independent broker/dealers in the country. Additionally, he spent several years with another independent broker/dealer, first as a trader and options principal, and then as a member of the senior management team. Jason holds two bachelor’s degrees, one in accounting and the other in behavioral science from Metropolitan State University of Denver, as well as an MBA in finance and accounting from Regis University. You can contact Jason at jason.hovde@cffp.edu.

Complexity Level: Intermediate