An investor can invest in several types of mutual funds. Each fund has certain advantages and disadvantages at the same time. Individual types of mutual funds can be combined with each other.
Money market funds
Money market funds invest mainly in short-term, highly safe bonds. The investment horizon of money market funds is a maximum of one year, but it is often shorter. In addition, these funds can also use term deposits with banks and credit unions. Exchange rate risk is low because fund managers buy securities in the same currency. However, high security is bought for the investor by a lower yield. Money market funds are suitable for short-term money storage. Some investors use them instead of savings accounts because, after passing the six-month test, they do not have to pay income tax when selling units.
Bond mutual funds
Bond funds are sometimes referred to as bonds or bonds. Although these words differ slightly in their meaning, lay people and not very professional public can sometimes refer to them as such. Bond funds invest primarily in bonds. The share component in these funds is usually lower; according to the valid Czech laws, the share of shares may not exceed 10 percent of the fund’s total assets. Bond funds can value investments a little more than money market funds. The recommended investment horizon is around two years.
Equity mutual funds
The share of shares in equity funds is at least 66 percent. For many investors, they are an ideal choice when investing. Their value is highly volatile and the risk is high. However, the reward for the investor is usually a higher share of appreciation, which is reflected in an increase in the value of the share certificate. The investment horizon should be at least five years. Experts recommend seven or ten years. If a person saves for retirement, the investment horizon can be as long as several decades.
Mixed or balanced funds stand on the border of equity and bond funds. The fund manager, or portfolio manager, buys stocks, bonds and money market funds. Investments in these individual securities are governed by the statute of the mixed fund. The portfolio manager thus adapts the assets to the current market situation. The investment strategy of mixed funds is sometimes very flexible. It can sometimes be confusing for the investor. Balanced funds have a medium to high investment risk, which corresponds to a long-term appreciation. The investment horizon should be longer, about three or more years.
Funds of funds
Funds of funds, as their name suggests, invest in other funds whose units they purchase. They do not invest directly in stocks or bonds. The fund manager thus creates a portfolio composed of other mutual funds. Investing in other mutual funds means spreading the risk for the unit-holders of the given fund.
Guaranteed funds guarantee (guarantee) to the investor that he will get it back after the investment or a share in a pre-agreed amount. Thus, guaranteed funds may in some cases mean a minimum investment guarantee for unit-holders. The investment horizon is in the hands of the fund manager and can last for several years. Among the advantages are the reduction of investment risk, the disadvantage is the tying of funds.