Asset class funds are pools of securities that primarily contain one type of marketable security. Equities and income securities are among the most well known asset classes, though there are many within these broad categories. Investment firms typically market asset class funds to investors who have a specific investment goal in mind such as saving for retirement.
Mutual fund shareholders have an ownership stake in a portfolio of different securities. Many people prefer to buy shares in a fund rather than buying individual stocks or bonds. A stock in a particular firm becomes worthless if the company that issued the stock ceases operations or becomes insolvent. People who invest in one type of stock stand to lose their entire investment if the firm they own shares in goes bankrupt. Investors with shares in a mutual fund may lose some money if one of the stocks in the fund becomes worthless but their fund shares still have some value as long as some of the securities within the fund have some value.
Some asset class funds contain a broad array of securities. A stock fund may contain stocks in large and small companies based both domestically and overseas. Many asset class funds contain a smaller selection of securities. Small cap funds primarily contain stocks issued by companies with relatively low levels of capitalization while a large cap fund contains stocks in major multi-national firms. Some investment firms create funds that only contain stocks that are tied to certain types of companies such as energy providers, telecommunication firms or banks.
Income asset class funds contain securities that provide shareholders with interest or dividend payments. These payments are normally received on a monthly basis and many people regard these payments as a secondary income source. Many income funds contain bonds that were issued by governments and corporations but other more aggressive funds contain mortgage-backed securities and bonds issued by foreign governments with poor credit ratings. Some income funds also contain credit default swaps (CDS) which work similarly to insurance products. The fund company sells a CDS to a party that holds a security and that party pays for the insurance protection by making monthly premium payments that are passed onto investors as dividends.
Laws in most nations require investment firms to clearly detail fund strategies in prospectuses and marketing materials. Fund companies can invest in broad asset classes or invest in a narrow selection of securities but a fund cannot change the make-up of its portfolio without notifying investors. A small cap fund company cannot start buying securities from a different asset class such as large cap stocks without notifying shareholders. Conversely, a fund company that sells a general stock fund can sell a large number of small cap stocks and replace those stocks with large cap stocks since the fund can hold all types of stocks.
