Posts Tagged ‘funds’

It will probably come as a surprise to many investors that Bond funds offer as many practical options as many of the equity funds on the market. As far as bond funds are concerned, you can have core bond funds that are high quality, low risk and you can high yield bond funds that offer mid quality and medium/high risk.

For many people, bond funds offer a great alternative to term-deposits. Not only do bond funds offer liquidity as well as higher rates of returns (than comparable term deposits), but they are an asset class all their own that allows investors to tactically shore up their asset allocation model.

For a limited few, bond funds present a tremendous opportunity. Since bonds do offer growth potential, there are tax advantages to owning bonds over other income-paying investments. In its most basic format, bonds bought at a discount and held to maturity allow for capital gains rather than straight income. In some (okay, most) jurisdictions, capital gains offer benefits at taxation time.  (However, if taxation is a primary concern when it comes to your investment strategy, you should consult your tax accountant to determine the best income source).

Since bond funds offer investors the opportunity to properly diversify their holdings, it has a considerable importance when it comes to your asset allocation model. The problem is that most investors have a tough time understanding the intricacies of bond funds. For example, bond prices will fluctuate based on many of the same factors that affect equity prices like currency, geopolitical, commodity as well as corporate risks.

The difference is that most bond funds will respond differently to those influences. As such, investors whose knowledge falls short on bonds need to align themselves with an advisor who does have something of a decent knowledge base when it comes to this asset class.

Growth funds are something of a sub-asset class when it comes to your overall asset allocation model. In most cases, growth funds are part of the equity holdings, but depending on your income class profile there could be a growth component to the income class as well. In the case of the income glass, growth will normally come from investing in higher-risk bonds or discounted bonds. These bonds will experience growth in periods of declining interest rates or at maturity when the bonds mature at face value.

In most instances, growth will come from capital appreciation in the value of an equity security, most often a stock. And this is typically how equity class growth funds operate – they will hunt for equities that have demonstrated long-term growth trends or potential. In many cases, growth funds will target stocks in high growth fields such as technology, bio-technology and developing technologies. However, since such industries are often speculative, so too can the investments be speculative.

As such, growth funds can be further categorized into sub-categories such as Large Cap Growth Funds which will invest primarily in securities that have a large market capitalization. These types of growth funds will have a slightly different approach and often a less aggressive investment objective. In most cases, the securities owned by the fund will be larger companies (such as Apple in the case of technology or General Electric in the case of emerging technologies) with strong balance sheets and heavy investments into longer-term, emerging technologies.

In some cases, growth funds will be “laser-focused” on an industry or sector. In the example above, this could mean the technology industry or, in less generalized terms, say the water-purification technology industry. This means that the fund might invest in a blend of large or small cap equities.

And in some cases still, some fund managers will target growth regions of the world. In the latest market bubble, many funds jumped on the “BRIC” nations which showed tremendous growth potential. These nations were Brazil, Russia, India and China. Even after the economic slowdown, many funds remain invested in these regions because of their perceived growth potential.

In other cases, growth funds will take a more general approach and simply invest in equities that show growth potential. In such cases, the fund can diversify across all market capitalization areas as well as across the different industries and sectors and geography. Normally, such broadly focused growth funds are larger mutual funds that merely aim to exceed the index performance.

Generally, growth funds make up a special area of the equity class of investments. Their primary focus is capital appreciation through growth rates that are expected to be greater than growth in other industries/sectors, similarly sized market-capitalized equities, or different geographical areas. Determining what makes a smart growth investment is often a subjective task that relies rather heavily on the skill and astute observations of a keen portfolio manager or analyst.