A mutual fund manager uses different strategies and methods to make sure that the fund grows and profit.
Index Funds
As is obvious with the name, index funds are created to track the performance of a certain index. Managers of index funds are required to employ a highly passive investment style because the goal of these funds is to match the index’s returns and not beat them.
To do this, the funds pour money in the same securities as the underlying index. Any stocks chosen by the manager, therefore, must be included on the index’s roster. New additions to the portfolio are brought about by a similar addition in the underlying index. If a security has been removed from the index, the index will sell that security’s shares from the portfolio.
Dividend Funds
Investors who are trying to supplement their annual income without much effort usually seek dividend funds. These funds are created to generate the greatest dividend histories and highest payouts. This sometimes means that it will stick with companies that have consistently paid or increased dividends for a certain number of years.
Growth Funds
Growth funds are created to build long-term gains for shareholders by investing in companies that are expected to increase in value over time. Growth fund managers concentrate on companies that are still expanding and expected to generate increased revenues, instead of those that pay dividends.
Some growth funds are specifically aggressive, so managers have to choose stocks depending on how quickly the company is expected to expand instead of its ability to provide long-term sustainable growth.
These funds usually trade securities that are poised for sudden bullish spikes. Afterwards, they sell the securities after the initial price jumps and moving on to the next potential trade.
Value Funds
Value funds are focused on companies with the potential for higher valuations. However, the strategy of value fund managers is to choose stocks that are currently being underestimated by the market. These funds mainly invest in stocks that are undervalued, meaning the current share price is low considering the company’s financial status and dividend payment history.
This typically means investing in stocks that are financially stable but has fallen out of favor in the market, usually due to a lackluster quarterly report or changes in consumer opinion, or even because investors have chosen other investments.
Arbitrage Funds
A newer type of funds and also known as alternative funds, arbitrage funds use some of the strategies that riskier hedge funds use when trying to generate higher returns. Arbitrage funds try to capitalize on the price discrepancies between the same securities on different markets.
Basically, the fund tries to buy and sell the same security at the same time on different markets or exchanges in order to reap the benefits of price differences generated by market inefficiencies.
Managers of arbitrage funds try to choose securities that offer the highest potential profits. That means the price spread is as wide as possible. This trading strategy is very excellent when there is an increased level of volatility in the market.