Funds are classified by what they invest in (equity, bond, money-market, balanced, sector/regional/thematic), by how they are managed (active vs passive/index), and by how they are structured (feeder funds, fund-of-funds, guaranteed/capital-protected) β each category carrying a distinct risk-return profile and cost.
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Must-know for the exam
βFunds are classified three ways at once: by ASSET CLASS (equity/bond/money-market/mixed), by MANAGEMENT STYLE (active vs passive), and by STRUCTURE (feeder, fund-of-funds, guaranteed).
βRisk-return ranking (broadly): equity funds highest, then balanced, then bond, with money-market funds lowest.
βEquity funds aim mainly at capital growth; common styles are growth vs value and large-cap vs small/mid-cap.
βBond funds' two main risks are interest-rate risk (prices fall as yields rise; longer DURATION = more sensitive) and CREDIT/default risk (investment-grade vs high-yield).
βMoney-market funds hold short-term high-quality instruments for capital preservation and liquidity; they are low-risk but NOT guaranteed and NOT deposit-insured.
βBalanced/mixed funds hold equities plus bonds (and cash) in one portfolio; the equity/bond split sets the risk level. Target-date funds shift toward bonds over time.
βACTIVE management tries to beat a benchmark (higher fees, no guarantee of outperformance); PASSIVE/INDEX management only tracks an index (low fees, low tracking error).
βIndex funds and most ETFs are passive; passive replication can be physical (holds constituents) or synthetic (uses derivatives, adding counterparty risk).
βA FEEDER fund invests almost entirely into a single master fund; a FUND-OF-FUNDS invests in other funds β both add an extra layer of fees.
βGuaranteed/capital-protected funds return a minimum (often original capital) at a set MATURITY, usually only if held to maturity, often cap the upside, and depend on the guarantor's creditworthiness.
βSector, regional/country and thematic funds are CONCENTRATED β less diversified and more volatile; regional funds add currency and country/political risk.
βIn Singapore, retail CIS follow the Securities and Futures Act and the Code on Collective Investment Schemes: local schemes are AUTHORISED, foreign schemes must be RECOGNISED, and both need a registered prospectus.
βCertain funds (e.g. some ETFs and structured funds) are Specified Investment Products (SIPs), sellable to retail clients only after a Customer Knowledge Assessment.
βFund name alone is not enough β suitability must come from the prospectus objective, risk factors and fees matched to the client's needs.
Why funds are classified
A collective investment scheme (CIS) pools money from many investors and invests it according to a stated investment objective and policy set out in the prospectus. Classifying funds helps investors match a scheme to their risk appetite, time horizon and income needs.
Funds are grouped along three independent dimensions, and any one fund sits on all three at once:
β’ASSET CLASS β what the fund holds (shares, bonds, cash instruments, or a mix).
β’MANAGEMENT STYLE β how holdings are chosen (active security selection vs passive index tracking).
β’STRUCTURE β how the fund is built (direct holdings, a feeder into a master fund, or a fund investing in other funds).
The prospectus and product highlights sheet disclose the objective, permitted investments, risk factors and fees, so an adviser must read them to establish suitability rather than rely on the fund's name alone.
Equity funds
An EQUITY (stock) fund invests mainly in shares, aiming primarily at capital growth, with dividends a secondary source of return. Equity funds generally carry the highest risk and the highest expected long-term return among the mainstream asset classes.
They are often sub-classified by investment style or focus:
β’GROWTH funds target companies expected to grow earnings faster than average; VALUE funds target shares seen as under-priced relative to fundamentals.
β’By market capitalisation β large-cap (typically more stable) versus small/mid-cap (higher growth potential, higher volatility).
β’By income emphasis β DIVIDEND / equity-income funds tilt towards higher-yielding shares.
Key risks are market (price) risk, and for foreign holdings, currency and country risk. Equity funds suit investors with a longer time horizon who can tolerate short-term volatility.
βConfusing marketing attributes (currency, size, fees) or a single dimension's sub-types (sector/region/theme) with the three core classification axes.
βReversing the order or misplacing balanced funds relative to bond funds.
βMixing up value (under-priced) with growth (fast earnings) or with a market-cap tilt.
βAssigning bond-fund (income), money-market (preservation) or guaranteed-fund (minimum return) objectives to an equity fund.
βBelieving fixed coupons insulate price, or confusing duration (rate sensitivity) with credit quality.
βAssuming higher-grade equals higher yield, or that any bond fund insures against default.
βTreating 'low-risk' as 'guaranteed' or 'deposit-insured'.
βAssuming all balanced funds share the same risk, or that holding cash/bonds raises risk.
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