Bonds, Mutual, index, and hedge funds

                Mutual funds, Index funds, and hedge funds, all of them are pooled vehicles of investments. Each of these three funds is suited for different type of investors, for example, Mutual funds and index funds are accessible to all classes of investors: Big and small; but hedge funds are limited to big and medium sophisticated investors only. So if you are not a big investor, Mutual funds and index funds may be the only viable fund investment options for you.

                Both, mutual funds and hedge funds are managed by managers. Hedge funds usually take aggressive speculative positions in derivative markets. Mutual funds are typically regulated more strictly than hedge funds are regulated, and do not uses unconventional leverage strategies. Index funds usually track a market index or a component of market i.e.- S&P 500, Dow Jones, Vanguard 500 index fund etc.

                According to research done by several financial institutions, index funds outperform managed funds most of the time. Index funds outperform more than 70% of managed funds. So choosing a managed fund that may outperform index fund is very difficult, as past performance of managed funds does not correlate well with its future performance. So even if you choose a top mutual fund, it is not very likely to remain on top in future. Mutual funds have the huge overhead of management and other fees. Real charges may vary from 1% to 3% of total investment value. Many of these charges are not properly conveyed to the customers. Mutual fund agents also get a commission between 3% and 8% on each sale. These charges and commissions make mutual funds bad investment instrument. Index funds have low management fees (.03 %) and give better returns in the long run.

Bonds: Corporations issue bonds to take a loan from the general public. These bonds are usually guaranteed by corporation’s assets and are considered safer investments than stocks. Financial institutions assess these bonds and based on the risks associated with them. Higher rated bonds are considered safer than lower rated bonds, but usually, have lower interest rate than the lower rated bonds. Municipal and government bonds usually have higher ratings and are considered a very low-risk investment. These bonds are generally to exempt, so if you want to decrease your tax- burden, you should buy these types of bonds. Bonds of stable developed countries are highly unlikely to default. But most bonds are not directly accessible to general public. The general public has to buy the bonds from derivatives markets, at high costs. These high costs of the derivative market make bond an undesirable investment instrument. If you are planning to buy bonds, you must ensure that they are not priced very high in relation to their original value.