Mutual funds are a viable alternative for those with money to invest but not the time or inclination to choose and track investments. Investors in mutual funds pay a fee for the service that the fund offers. A traditional mutual fund invests in stocks. And there are alternative mutual funds as well. The SEC on its investor.gov page writes about alternative mutual funds. They are mutual funds registered with the SEC which use complex trading or investment strategies or simply hold non-traditional investments.
What Are Alternative Mutual Funds?
In many ways alternative mutual funds resemble hedge funds. They commonly use more complex strategies and investments than traditional funds investing in things like global real estate, commodities like oil or gold, or start-ups. They typically aim to provide higher returns than traditional funds. They differ from hedge funds in that they commonly require lower fees, are open to the public and not just “accredited investors,” and are regulated under the Investment Company Act of 1940 with provides safeguards against illiquid investments and restrictions on debt and borrowing. And these mutual funds allow investors to sell their shares at any time unlike many hedge funds.
Investment Mutual Funds
A mutual fund investor owns shares in a company which, in turn, buys stock, bonds, or other securities. These investors share “mutually” in the profits and losses of the mutual fund company but not in the companies whose stocks and bonds the mutual fund purchases. The point of a mutual fund is that it allows access to a wider variety of investments than individuals could hope to invest in. Investors pay a fee for this access and management of investments by the company. Mutual fund investors share dividend payments, capital gains, and higher (or lower) asset value.
Cash Alternative Mutual Funds
A traditional mutual fund holds a portion of its assets in cash. This allows the fund to make purchases of attractive investments without having to borrow or sell other assets first. A cash alternative is anything instead of holding assets in dollars or other currencies. A type of mutual fund that can only invest in short term, high quality US securities is a money market fund. Many investors hold cash not being currently invested in one of these mutual funds without realizing that it is a mutual fund.
Alternative Energy Mutual Funds
Investors who are interested in ESG sorts of investments often do not have the skills or time needed to choose specific investments. Alternative energy mutual funds are one good option for these individuals. The mutual fund chooses investments and manages them. The investor receives their portion of any available dividends, their portion of cash appreciation, and their fraction of capital gains from shares sold at a profit as the fund turns over its investments.
401K Plan Mutual Fund Alternatives
A 401K is an excellent way to invest for retirement. The quandary for many workers is that they do not have the expertise and often not the time to choose investments and manage a 401K portfolio. As such a good option can be a mutual fund as part of or the entirety of a person’s 401K. Because investments in the 401K are not taxed until withdrawn at retirement the 401K owner is not taxed on capital gains as they would be from a mutual fund owned outside of a retirement plan.
40 Act Alternative Mutual Funds
The 1940 Investment Company Act defines four different types of investment vehicles. They are closed-end funds (CEFs), open-end mutual funds, unit investment trusts (UITs), and exchange-traded funds (ETFs). Open-end mutual funds are the largest investment vehicles in this category. All of these are governed by the same rules regulating operations, establishment, and reporting requirements. Both traditional open-end mutual funds and those engaging in alternative investments are subject to the rules of the Investment Company Act of 1940.