Tripod Home | New | TriTeca | Work/Money | Politics/Community | Living/Travel | Planet T | Daily Scoop
Just as stock and bond funds are designed to appeal to a range of investment goals or objectives, there are some highly focused funds that hone in on special market segments. Sector funds, for example, buy shares in a particular industry like health care or electronics, while country funds make investments in just one country.
Funds with specialized investment goals are introduced regularly. Some become extremely popular, while others make a big splash and then disappear. That's what happened to equity option funds in the late 80s.
Index funds are designed to produce the same return that investors would get if they owned all the stocks in a particular index - like the Standard & Poor's 500.Few individuals could own shares in all the companies in an index, but it's all in a day's work for an index fund. There are currently more than 40 index funds tracking almost every known index for large, medium, and small companies, as well as bond market indexes and several international stock indexes, also known as equity indexes.
Index funds are popular because the performances of the major stock and bond indexes often surpass the returns that professional mutual fund managers achieve by following a particular investment theory.
And you can use an index fund to balance your portfolio. For example, you could buy aggressive growth funds and a big company index fund like the S&P; 500. That way, whichever part of the economy does better, you'll profit from being invested in it.
In some phases of the economic cycle, individual fund performance can leave index funds in the dust, especially if a certain type of investment is doing very well but isn't represented in the companies covered by the index. And as a rule, index funds that track small companies as a group produce spottier results than growth funds that invest directly in specific small companies.
If you're looking for tax-exempt earnings, there are specific bond and money market funds designed for you. The money you earn from stock funds and most bond funds - whether from payment of dividends, distributions, or capital gains - is taxed by the government.
But funds that invest in municipal bonds issued by state and local governments pay distributions that are exempt from federal, and sometimes state and local, income taxes.
Non-taxable income is particularly appealing to people in the highest tax brackets. The biggest tax savings occur when a person who lives in a high-tax state - like California - buys a fund that specializes in bonds issued there. The interest is free of both state and federal tax. And when a fund buys bonds issued by a municipality like New York City, the interest is triple tax free (no federal, state, or local taxes) for local residents who invest in the fund.
There are circumstances when you end up owing income tax on tax-exempt investments.
If you earn money by selling a tax-exempt investment - that's called a capital gain - you'll owe income tax on that amount.
If you own a tax-exempt fund that holds municipal bonds from a state other than your own, you may owe state income tax on income you earn from those bonds.
Your fund should supply year-end tax information telling you the amounts you must declare as taxable income.
The dilemma that many mutual funds face is finding enough high-quality investments to meet investor demands. This can be especially hard for tax-free funds, and even harder for single-state funds. In the worst-case scenario, a fund may wind up buying riskier bonds, or may be forced to buy out-of-state bonds, which could end up costing you tax money.
You should avoid tax-exempt funds when you're choosing investments for your IRA or other self-directed retirement plan, like a SEP or Keogh. That's because all earnings are lumped together and taxed when you start taking money out of your account. That includes earnings that would be tax-exempt if you'd kept them separate from the IRA.
Sector funds make their investments in a particular industry or segment of the economy, like technology, health care, or financial services.Because it makes only one kind of investment, a sector fund is out of step with the underlying principle behind mutual funds - diversification. But the funds are popular because they often produce outstanding results, at least for a period of time when that sector is hot.
If you buy a sector fund, your investment will be more diversified than it would be if you'd bought a single stock. But if there is a downturn in the sector where a fund has invested all its money, there is nothing in the portfolio to offset those losses.
Since sectors are highly volatile - which means that their value can shift quickly - they offer an opportunity for big profits to investors who ride the right wave. And new sector funds are offered regularly to take advantage of new economic trends.
But generally, one year's hot sector is the next year's dud. An example is the sharp downturn in pharmaceutical stocks in 1993, after a period of substantial growth.
The starting point for some special funds is what they won't buy.Some mutual fund companies have created funds targeted to match the political or social commitments of a particular kind of investor. To look at it the other way, some people are unwilling to invest in companies whose business practices or products they disapprove of.
For example, a "green fund" might refuse to invest in tobacco companies, companies with poor environmental records, or those that sell harmful products in underdeveloped countries. While green funds rarely make it to the top of performance charts because of the restrictions on what they buy, many funds have posted at least average and sometimes better-than-average growth.
Unlike other specialty funds, green funds aren't treated as a special category in The Wall Street Journal column called "Mutual Funds Quotations" or by Lipper Analytical Services. Investors who feel strongly about where their money goes may have to do extra research to find a fund they want to use.
Some special-interest groups sponsor their own green funds or recommend particular ones. And socially conscious funds are increasingly being offered as an option in employers' 401(k) or 403(b) salary-reduction retirement plans.
International Funds, also known as Overseas Funds, invest in stocks or bonds sold in other countries' markets. By spreading investments throughout the world, these funds balance risk by owning stocks and bonds not only in mature, stable economies but also in the booming economies of many small nations. They also make international investing easier for the average person by handling all tax-reporting and currency calculations.
Most experts agree about the benefits of international stock funds, but many have serious reservations about the value of international bond funds because of changing currency values and the effects of inflation.
A global fund is different from an international fund because it buys both American and international securities.By combining overseas investments with domestic ones, Global Funds - sometimes called World Funds - strive for flexibility as well as diversity. The fund manager moves the assets around, depending on where the market strengths are at the time. Despite the name, though, most global funds keep about 75 percent of their assets in the US.
Mutual fund companies have been developing funds to capitalize on growth spurts in various parts of the world.Regional Funds concentrate on a particular geographic area, like the Pacific Rim, Latin America, or Europe. Many mutual fund companies that began by offering international or global funds have added regional funds to capitalize on the growing interest in overseas investing and on the strength of particular parts of the world economy.
Like the broader-based international funds, regional funds invest in several different countries so that even if one market is in the doldrums the others may be booming.
Among the most specialized of the special funds are those that invest in a single country.Country Funds, usually closed-end funds, let you concentrate your investments in a single overseas location. It might be a stable, industrialized country, an emerging nation, or even a country whose markets are closed to individual investors who aren't citizens.
By buying a mutual fund that concentrates on an emerging country, investors can profit from rapid economic growth as the country industrializes or expands its export markets. The risk, however, is that the fund's value can erode in the event of political or economic turmoil.
Map
| Search
| Help
| Send Us Comments