Home loan is taken out from a bank or financial company in order to purchase /construct a new house or reconstruct an existing mortgage. There is several different ways in which an individual can get a home loan mortgage. Over the past few years, many new banks and housing finance companies have opened up and are providing attractive and low lending rates. There are many housing finance companies have opened up and are ready to give you the latest information about the bank of mortgage rates.

An individual who I looking for housing loans should be aware of all his requirements and then he / she can search for housing finance services in India.

Without knowing the requirements it is difficult to understand the process of a home loan. A borrower who is ready to go for house loan should check their monthly incomes and the location of the borrower. You will also want to look into getting home insurance quotes for new home. Give the present economic conditions, the prices of properties are rapidly on the rise especially in the major cities across India. This is making it difficult for middle class families to afford these hug investments. Keeping these facts in mind, bank of mortgage services in India considered these facts and came up with attractive mortgage interest rates so that the middle class families can take a home lending bank loan, Borrowers should consider each and every aspects of home lending from selecting the property to closing the finance loan amount. The borrowers will be maintaining a

Long term relationship with the finance company so it wise to take loan from a bank which you feel comfortable with.

 

The most common purpose of a home loan is to provide the funds a buyer needs to purchase a home. Home equity loans allow a homeowner to borrow against the difference between the home’s value and the current loan balance, or equity. Investor loans permit buyers to purchase homes as rental properties or to fix up and sell at a profit.

  1. Types of Home Loans:-

 

  • The two most widely used types of home loans are fixed-rate loans and adjustable-rate loans. A fixed-rate loan keeps the same interest rate for the life of the loan, which means that the principal and interest portions of the monthly payment stay the same. Adjustable-rate mortgages begin with a lower interest rate for the first few years and then adjust to market rates after the initial period is over. Caps are placed on how much the rate can adjust at any given time, as well as on how much the rate can increase over the duration of loan. This means the principal and interest portions of the monthly payment change repeatedly through the duration of loan. There are different types of home loans tailored to meet our needs. Here is a list of few:
  • Home Purchase Loans: This is the basic home loan for the purchase of a new home.
  • Home Improvement Loans: These loans are given for implementing repair works and renovations in a home that has already been purchased.
  • Home Construction Loan: This loan is available for the construction of a new home.
  • Home Extension Loan: This is given for expanding or extending an existing home. For eg: addition of an extra room etc.
  • Home Conversion Loan: This is available for those who have financed the present home with a home loan and wish to purchase and move to another home for which some extra funds are required. Through home conversion loan, the existing loan is transferred to the new home including the extra amount required, eliminating the need of pre-payment of the previous loan.
  • Land Purchase Loans: This loan is available for purchase of land for either construction or investment purposes.

 

HOME LOAN PROCEDURE

With the increasing competition in the market for offering Home Loans, the otherwise tedious process of availing loans has gone a tremendous change in the recent years. However, there is still some process involved in the procurement of Home loan. It is advisable for borrower to first look at the different stages required for obtaining a Home Loan. Here is step by step procedure of procuring home loan.

 

Step 1 : Application form

Step 2 : Personal Discussion

Step 3: Bank's Field Investigation

Step 4: Credit appraisal by the bank and loan sanction

Step 5: Offer Letter

Step 6: Submission of legal documents & legal check

Step 7: Technical / Valuation check

Step 8: Registration of property documents

Step 9: Signing of agreements and submitting post-dated cheques.

Step 10: Disbursement

 

​​​​​​​

We have tie-up with followings bankers:-

 Nationalized banks , private , cooperative bank and Financial Institutes:-

  • Bank of Baroda Home
  • Canara Bank Home Loan
  • United Bank of India Home Loan
  • Corporation Bank Home Loan
  • Central Bank of India Home Loan
  • Dena Bank Home
  • Allahabad Bank Home
  • Allahabad Bank Home
  • SBI Home Loan
  • Standard Chartered
  • Iindia Bulls
  • Yes Bank
  • DHFL
  • Hdfc bank
  • LHF
  • Punjab Housing Finance 

BONDS

In finance, a bond is an instrument of indebtedness of the bond issuer to the holders. The most common types of bonds include municipal bonds and corporate bonds.

The bond is a debt security, under which the issuer owes the holders a debt and (depending on the terms of the bond) is obliged to pay them interest (the coupon) or to repay the principal at a later date, termed the maturity date. Interest is usually payable at fixed intervals (semiannual, annual, sometimes monthly). Very often the bond is negotiable, that is, the ownership of the instrument can be transferred in the secondary market. This means that once the transfer agents at the bank medallion stamp the bond, it is highly liquid on the secondary market.

Thus a bond is a form of loan or IOU: the holder of the bond is the lender (creditor), the issuer of the bond is the borrower (debtor), and the coupon is the interest. Bonds provide the borrower with external funds to finance long-term investments, or, in the case of government bonds, to finance current expenditure. Certificates of deposit (CDs) or short-term commercial paper are considered[by whom?] to be money marketinstruments and not bonds: the main difference is the length of the term of the instrument.

Bonds and stocks are both securities, but the major difference between the two is that (capital) stockholders have an equity stake in a company (that is, they are owners), whereas bondholders have a creditor stake in the company (that is, they are lenders). Being a creditor, bondholders have priority over stockholders. This means they will be repaid in advance of stockholders, but will rank behind secured creditors, in the event of bankruptcy.[3] Another difference is that bonds usually have a defined term, or maturity, after which the bond is redeemed, whereas stocks typically remain outstanding indefinitely. An exception is an irredeemable bond, such as a consol, which is a perpetuity, that is, a bond with no maturity.

Etymology

In English, the word "bond" relates to the etymology of "bind". In the sense "instrument binding one to pay a sum to another", use of the word "bond" dates from at least the 1590s

 

INSURANCE

Bonds are issued by public authorities, credit institutions, companies and supranational institutions in the primary markets. The most common process for issuing bonds is through underwriting. When a bond issue is underwritten, one or more securities firms or banks, forming a syndicate, buy the entire issue of bonds from the issuer and re-sell them to investors. The security firm takes the risk of being unable to sell on the issue to end investors. Primary issuance is arranged by bookrunners who arrange the bond issue, have direct contact with investors and act as advisers to the bond issuer in terms of timing and price of the bond issue. The bookrunner is listed first among all underwriters participating in the issuance in the tombstone ads commonly used to announce bonds to the public. The bookrunners' willingness to underwrite must be discussed prior to any decision on the terms of the bond issue as there may be limited demand for the bonds.

In contrast, government bonds are usually issued in an auction. In some cases, both members of the public and banks may bid for bonds. In other cases, only market makers may bid for bonds. The overall rate of return on the bond depends on both the terms of the bond and the price paid.[5] The terms of the bond, such as the coupon, are fixed in advance and the price is determined by the market.

In the case of an underwritten bond, the underwriters will charge a fee for underwriting. An alternative process for bond issuance, which is commonly used for smaller issues and avoids this cost, is the private placement bond. Bonds sold directly to buyers may not be tradeable in the bond market.

Historically an alternative practice of issuance was for the borrowing government authority to issue bonds over a period of time, usually at a fixed price, with volumes sold on a particular day dependent on market conditions. This was called a tap issue or bond tap.

Principal

https://upload.wikimedia.org/wikipedia/commons/thumb/6/6e/1978_%241000_8_3-8%25_Treasury_Bond_%28reverse%29.jpg/220px-1978_%241000_8_3-8%25_Treasury_Bond_%28reverse%29.jpg

1978 $1,000 U.S. Treasury Bond

Nominal, principal, par, or face amount is the amount on which the issuer pays interest, and which, most commonly, has to be repaid at the end of the term. Some structured bonds can have a redemption amount which is different from the face amount and can be linked to the performance of particular assets.

Maturity

The issuer has to repay the nominal amount on the maturity date. As long as all due payments have been made, the issuer has no further obligations to the bond holders after the maturity date. The length of time until the maturity date is often referred to as the term or tenure or maturity of a bond. The maturity can be any length of time, although debt securities with a term of less than one year are generally designated money market instruments rather than bonds. Most bonds have a term of up to 30 years. Some bonds have been issued with terms of 50 years or more, and historically there have been some issues with no maturity date (irredeemable). In the market for United States Treasury securities, there are three categories of bond maturities:

  • short term (bills): maturities between one and five years;
  • medium term (notes): maturities between six and twelve years;
  • long term (bonds): maturities longer than twelve years.

Coupon

The coupon is the interest rate that the issuer pays to the holder. Usually this rate is fixed throughout the life of the bond. It can also vary with a money market index, such as LIBOR, or it can be even more exotic. The name "coupon" arose because in the past, paper bond certificates were issued which had coupons attached to them, one for each interest payment. On the due dates the bondholder would hand in the coupon to a bank in exchange for the interest payment. Interest can be paid at different frequencies: generally semi-annual, i.e. every 6 months, or annual.

Yield

The yield is the rate of return received from investing in the bond. It usually refers either to

  • The current yield, or running yield, which is simply the annual interest payment divided by the current market price of the bond (often the clean price).
  • The yield to maturity, or redemption yield, which is a more useful measure of the return of the bond. This takes into account the current market price, and the amount and timing of all remaining coupon payments and of the repayment due on maturity. It is equivalent to the internal rate of return of a bond.

 

 

 

Types

https://upload.wikimedia.org/wikipedia/commons/thumb/8/8a/South_Carolina_consolidation_bond.jpg/250px-South_Carolina_consolidation_bond.jpg

Bond certificate for the state of South Carolina issued in 1873 under the state's Consolidation Act.

https://upload.wikimedia.org/wikipedia/commons/thumb/3/3d/Obligatie-Moskau-Kiev-Woronesch.jpg/250px-Obligatie-Moskau-Kiev-Woronesch.jpg

Railroad obligation of the Moscow-Kiev-Voronezh railroad company, printed in Russian, Dutch and German.

The following descriptions are not mutually exclusive, and more than one of them may apply to a particular bond:

  • Fixed rate bonds have a coupon that remains constant throughout the life of the bond. A variation are stepped-coupon bonds, whose coupon increases during the life of the bond.
  • Floating rate notes (FRNs, floaters) have a variable coupon that is linked to a reference rate of interest, such as Libor or Euribor. For example, the coupon may be defined as three-month USD LIBOR + 0.20%. The coupon rate is recalculated periodically, typically every one or three months.
  • Zero-coupon bonds (zeros) pay no regular interest. They are issued at a substantial discount to par value, so that the interest is effectively rolled up to maturity (and usually taxed as such). The bondholder receives the full principal amount on the redemption date. An example of zero coupon bonds is Series E savings bonds issued by the U.S. government. Zero-coupon bonds may be created from fixed rate bonds by a financial institution separating ("stripping off") the coupons from the principal. In other words, the separated coupons and the final principal payment of the bond may be traded separately. See IO (Interest Only) and PO (Principal Only).
  • High-yield bonds (junk bonds) are bonds that are rated below investment grade by the credit rating agencies. As these bonds are riskier than investment grade bonds, investors expect to earn a higher yield.
  • Convertible bonds let a bondholder exchange a bond to a number of shares of the issuer's common stock. These are known as hybrid securities, because they combine equity and debt features.
  • Exchangeable bonds allows for exchange to shares of a corporation other than the issuer.
  • Inflation-indexed bonds (linkers) (US) or Index-linked bond (UK), in which the principal amount and the interest payments are indexed to inflation. The interest rate is normally lower than for fixed rate bonds with a comparable maturity (this position briefly reversed itself for short-term UK bonds in December 2008). However, as the principal amount grows, the payments increase with inflation. The United Kingdom was the first sovereign issuer to issue inflation linked gilts in the 1980s. Treasury Inflation-Protected Securities (TIPS) and I-bonds are examples of inflation linked bonds issued by the U.S. government.

https://upload.wikimedia.org/wikipedia/commons/thumb/c/cb/Receipt_for_temporary_bonds.jpg/250px-Receipt_for_temporary_bonds.jpg

Receipt for temporary bonds for the state of Kansas issued in 1922

  • Other indexed bonds, for example equity-linked notes and bonds indexed on a business indicator (income, added value) or on a country's GDP.
  • Asset-backed securities are bonds whose interest and principal payments are backed by underlying cash flows from other assets. Examples of asset-backed securities are mortgage-backed securities (MBSs), collateralized mortgage obligations (CMOs) and collateralized debt obligations (CDOs).
  • Subordinated bonds are those that have a lower priority than other bonds of the issuer in case of liquidation. In case of bankruptcy, there is a hierarchy of creditors. First the liquidator is paid, then government taxes, etc. The first bond holders in line to be paid are those holding what is called senior bonds. After they have been paid, the subordinated bond holders are paid. As a result, the risk is higher. Therefore, subordinated bonds usually have a lower credit rating than senior bonds. The main examples of subordinated bonds can be found in bonds issued by banks, and asset-backed securities. The latter are often issued in tranches. The senior tranches get paid back first, the subordinated tranches later.
  • Covered bonds are backed by cash flows from mortgages or public sector assets. Contrary to asset-backed securities the assets for such bonds remain on the issuers balance sheet.
  • Perpetual bonds are also often called perpetuities or 'Perps'. They have no maturity date. The most famous of these are the UK Consols, which are also known as Treasury Annuities or Undated Treasuries. Some of these were issued back in 1888 and still trade today, although the amounts are now insignificant. Some ultra-long-term bonds (sometimes a bond can last centuries: West Shore Railroad issued a bond which matures in 2361 (i.e. 24th century)) are virtually perpetuities from a financial point of view, with the current value of principal near zero.
  • Bearer bond is an official certificate issued without a named holder. In other words, the person who has the paper certificate can claim the value of the bond. Often they are registered by a number to prevent counterfeiting, but may be traded like cash. Bearer bonds are very risky because they can be lost or stolen. Especially after federal income tax began in the United States, bearer bonds were seen as an opportunity to conceal income or assets.[9] U.S. corporations stopped issuing bearer bonds in the 1960s, the U.S. Treasury stopped in 1982, and state and local tax-exempt bearer bonds were prohibited in 1983.[10]
  • Registered bond is a bond whose ownership (and any subsequent purchaser) is recorded by the issuer, or by a transfer agent. It is the alternative to a Bearer bond. Interest payments, and the principal upon maturity are sent to the registered owner.
  • A government bond, also called Treasury bond, is issued by a national government and is not exposed to default risk. It is characterized as the safest bond, with the lowest interest rate. A treasury bond is backed by the “full faith and credit” of the relevant government. For that reason, for the major OECD countries this type of bond is often referred to as risk-free.
  • https://upload.wikimedia.org/wikipedia/commons/thumb/e/e8/San_Francisco_Pacific_Railroad_Bond_WPRR_1865.jpg/220px-San_Francisco_Pacific_Railroad_Bond_WPRR_1865.jpg

Pacific Railroad Bond issued by City and County of San Francisco, CA. May 1, 1865

Municipal bond is a bond issued by a state, U.S. Territory, city, local government, or their agencies. Interest income received by holders of municipal bonds is often exempt from the federal income tax and from the income tax of the state in which they are issued, although municipal bonds issued for certain purposes may not be tax exempt.

  • Build America Bonds (BABs) are a form of municipal bond authorized by the American Recovery and Reinvestment Act of 2009. Unlike traditional US municipal bonds, which are usually tax exempt, interest received on BABs is subject to federal taxation. However, as with municipal bonds, the bond is tax-exempt within the US state where it is issued. Generally, BABs offer significantly higher yields (over 7 percent) than standard municipal bonds.[11]
  • Book-entry bond is a bond that does not have a paper certificate. As physically processing paper bonds and interest coupons became more expensive, issuers (and banks that used to collect coupon interest for depositors) have tried to discourage their use. Some book-entry bond issues do not offer the option of a paper certificate, even to investors who prefer them.[12]
  • Lottery bonds are issued by European and other states. Interest is paid as on a traditional fixed rate bond, but the issuer will redeem randomly selected individual bonds within the issue according to a schedule. Some of these redemptions will be for a higher value than the face value of the bond.
  • War bond is a bond issued by a government to fund military operations during wartime. This type of bond has low return rate.
  • Serial bond is a bond that matures in installments over a period of time. In effect, a $100,000, 5-year serial bond would mature in a $20,000 annuity over a 5-year interval.
  • Revenue bond is a special type of municipal bond distinguished by its guarantee of repayment solely from revenues generated by a specified revenue-generating entity associated with the purpose of the bonds. Revenue bonds are typically "non-recourse", meaning that in the event of default, the bond holder has no recourse to other governmental assets or revenues.
  • Climate bond is a bond issued by a government or corporate entity in order to raise finance for climate change mitigation- or adaptation-related projects or programmes.
  • Dual currency bonds [13]
  • Retail bonds are a type of corporate bond mostly designed for ordinary investors.[14] They have become particularly attractive since the London Stock Exchange (LSE) launched an order book for retail bonds.[15]
  • Social impact bonds are an agreement for public sector entities to pay back private investors after meeting verified improved social outcome goals that result in public sector savings from innovative social program pilot projects


A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. These investors may be retail or institutional in nature.

Mutual funds have advantages and disadvantages compared to direct investing in individual securities. The primary advantages of mutual funds are that they provide economies of scale, a higher level of diversification, they provide liquidity, and they are managed by professional investors. On the negative side, investors in a mutual fund must pay various fees and expenses.

Primary structures of mutual funds include open-end funds, unit investment trusts, and closed-end funds. Exchange-traded funds (ETFs) are open-end funds or unit investment trusts that trade on an exchange. Mutual funds are also classified by their principal investments as money market funds, bond or fixed income funds, stock or equity funds, hybrid funds or other. Funds may also be categorized as index funds, which are passively managed funds that match the performance of an index, or actively managed funds. Hedge funds are not mutual funds; hedge funds cannot be sold to the general public and are subject to different government regulations.

HISTORY OF MUTUL FUND:

The first modern investment funds (the precursor of today's mutual funds) were established in the Dutch Republic. In response to the financial crisis of 1772–1773, Amsterdam-based businessman Abraham (or Adriaan) van Ketwich formed a trust named Eendragt Maakt Magt ("unity creates strength"). His aim was to provide small investors with an opportunity to diversify.[1][2]

Mutual funds were introduced to the United States in the 1890s. Early U.S. funds were generally closed-end funds with a fixed number of shares that often traded at prices above the portfolio net asset value. The first open-end mutual fund with redeemable shares was established on March 21, 1924 as the Massachusetts Investors Trust. (It is still in existence today and is now managed by MFS Investment Management.)

In the United States, closed-end funds remained more popular than open-end funds throughout the 1920s. In 1929, open-end funds accounted for only 5% of the industry's $27 billion in total assets.

After the Wall Street Crash of 1929, the U.S. Congress passed a series of acts regulating the securities markets in general and mutual funds in particular.

  • The Securities Act of 1933 requires that all investments sold to the public, including mutual funds, be registered with the SEC and that they provide prospective investors with a prospectus that discloses essential facts about the investment.
  • The Securities and Exchange Act of 1934 requires that issuers of securities, including mutual funds, report regularly to their investors; this act also created the Securities and Exchange Commission, which is the principal regulator of mutual funds.
  • The Revenue Act of 1936 established guidelines for the taxation of mutual funds.
  • The Investment Company Act of 1940 established rules specifically governing mutual funds.

These new regulations encouraged the development of open-end mutual funds (as opposed to closed-end funds).

Growth in the U.S. mutual fund industry remained limited until the 1950s, when confidence in the stock market returned. By 1970, there were approximately 360 funds with $48 billion in assets.[3]

The introduction of money market funds in the high interest rate environment of the late 1970s boosted industry growth dramatically. The first retail index fund, First Index Investment Trust, was formed in 1976 by The Vanguard Group, headed by John Bogle; it is now called the "Vanguard 500 Index Fund" and is one of the world's largest mutual funds. Fund industry growth continued into the 1980s and 1990s.

According to Pozen and Hamacher, growth was the result of three factors:

  1. A bull market for both stocks and bonds,
  2. New product introductions (including funds based on municipal bonds, various industry sectors, international funds, and target date funds) and
  3. Wider distribution of fund shares, including through employee-directed retirement accounts such as 401(k) and other defined contribution plans and individual retirement accounts (IRAs.) Among the new distribution channels were retirement plans. Mutual funds are now the preferred investment option in certain types of fast-growing retirement plans, specifically in 401(k) and other defined contribution plans and in individual retirement accounts (IRAs), all of which surged in popularity in the 1980s.[4]

In 2003, the mutual fund industry was involved in a scandal involving unequal treatment of fund shareholders. Some fund management companies allowed favored investors to engage in late trading, which is illegal, or market timing, which is a practice prohibited by fund policy. The scandal was initially discovered by former New York Attorney General Eliot Spitzer and led to a significant increase in regulation. In a study about German mutual funds Gomolka (2007) found statistical evidence of illegal time zone arbitrage in trading of German mutual funds [5]. Though reported to regulators BAFIN never commented on these results.

Total mutual fund assets fell in 2008 as a result of the financial crisis of 2007–2008.

MUTUL FUND TODAY

At the end of 2016, mutual fund assets worldwide were $40.4 trillion, according to the Investment Company Institute.[6] The countries with the largest mutual fund industries are:

  1. United States: $18.9 trillion
  2. Luxembourg: $3.9 trillion
  3. Ireland: $2.2 trillion
  4. Germany: $1.9 trillion
  5. France: $1.9 trillion
  6. Australia: $1.6 trillion
  7. United Kingdom: $1.5 trillion
  8. Japan: $1.5 trillion
  9. China: $1.3 trillion
  10. Brazil: $1.1 trillion

In the United States, mutual funds play an important role in U.S. household finances. At the end of 2016, 22% of household financial assets were held in mutual funds. Their role in retirement savings was even more significant, since mutual funds accounted for roughly half of the assets in individual retirement accounts, 401(k)s and other similar retirement plans.[7] In total, mutual funds are large investors in stocks and bonds.

Luxembourg and Ireland are the primary jurisdictions for the registration of UCITS funds. These funds may be sold throughout the European Union and in other countries that have adopted mutual recognition regimes.

Advantages and disadvantages to investors

Mutual funds have advantages and disadvantages compared to investing directly in individual securities:

ADVANTAGE

  • Increased diversification: A fund diversifies holding many securities; this diversification decreases risk.
  • Daily liquidity: Shareholders of open-end funds and unit investment trusts may sell their holdings back to the fund at regular intervals at a price equal to the net asset value of the fund's holdings. Most funds allow investors to redeem in this way at the close of every trading day.
  • Professional investment management: Open-and closed-end funds hire portfolio managers to supervise the fund's investments.
  • Ability to participate in investments that may be available only to larger investors. For example, individual investors often find it difficult to invest directly in foreign markets.
  • Service and convenience: Funds often provide services such as check writing.
  • Government oversight: Mutual funds are regulated by a governmental body
  • Transparency and ease of comparison: All mutual funds are required to report the same information to investors, which makes them easier to compare[8]

 

  • DISADVANTAGES

Mutual funds have disadvantages as well, which include:

  • Fees
  • Less control over timing of recognition of gains
  • Less predictable income
  • No opportunity to customize[9]

What is 'Portfolio Management'

Portfolio management is the art and science of making decisions about investment mix and policy, matching investments to objectives, asset allocation for individuals and institutions, and balancing risk against performance. Portfolio management is all about determining strengths, weaknesses, opportunities and threats in the choice of debt vs. equity, domestic vs. international, growth vs. safety, and many other trade-offs encountered in the attempt to maximize return at a given appetite for risk.

What is an 'Asset Allocation Fund'An asset allocation fund is a fund that provides investors with a diversified portfolio of investments across various asset classes. The asset allocation of the fund can be fixed or variable among a mix of asset classes. Popular asset categories for asset allocation funds include stocks, bonds and cash equivalents

BREAKING DOWN 'Asset Allocation Fund'

Asset allocation funds were developed from modern portfolio theory. Modern portfolio theory shows that investors can achieve optimal returns by investing in a diversified portfolio of investments included in an efficient frontier. The standard applications of modern portfolio theory investing include an efficient frontier of stocks, bonds and cash equivalents. Furthermore, modern portfolio theory outlines how a portfolio can vary its asset mix to tailor to the risk tolerance of the investor.

Asset allocation funds provide a simplified application of modern portfolio theory with varying allocations and combinations of assets for investors. One of the most common types of asset allocation funds is a "balanced fund." A balanced fund implies a balanced allocation of equities and fixed income, such as 60% stocks and 40% bonds. Investors will find numerous funds deploying the 60/40 mix as it has become a popular standardized strategy for investors seeking broad market diversification. Asset allocation funds also offer varying levels of diversification based on risk tolerance. Investors seeking additional investing categories beyond just 60/40 will find many options, including conservative allocation funds, moderate allocation funds and aggressive alloca­tion funds.

"Life-cycle" or "target-date" funds, usually used in retirement planning, are also considered a type of asset allocation fund. These funds are managed with a targeted mix of asset classes that starts out with a higher risk-return position and gradually becomes less risky as the fund nears its targeted utilization date.

After determining a targeted asset allocation, funds can manage their investment selection in a number of ways. Some funds may choose to invest in a variety of exchange-traded funds to represent different market exposures. Other funds may take a more active approach by using fundamental analysis to select top performing securities in each asset class. Overall, most funds will actively monitor and allocate securities in response to evolving market conditions and economic environments.

Investing in Asset Allocation Funds

Below are examples of some of the investment industry’s top asset allocation funds.

iShares Core Aggressive Allocation ETF (AOA)

The iShares Core Aggressive Allocation ETF is a tracker fund that seeks to replicate the performance of the S&P Target Risk Aggressive Index. The Fund invests in targeted ETFs that seek to replicate the Index. The Index is heavily weighted towards equities, targeting investors with high risk tolerance.

iShares Core Conservative Allocation ETF (AOK)

The iShares Core Conservative Allocation ETF is a tracker fund that seeks to replicate the performance of the S&P Target Risk Conservative Index. The Fund invests in ETFs that seek to replicate the Index. The Index is heavily weighted towards fixed income, targeting investors with a more conservative risk tolerance.

Vanguard Balanced Index (VBINX)

Investors seeking asset allocation funds will find a number of options with Vanguard. The firm’s Vanguard Balanced Index fund invests approximately 60% in stocks and 40% in bonds. Its holdings seek to track two indexes, the CRSP US Total Market Index and the Bloomberg Barclays U.S. Aggregate Float Adjusted Bond Index.



What is a 'Hybrid Fund'

A hybrid fund is an investment fund that is characterized by diversification among two or more asset classes. These funds typically invest in a mix of stocks and bonds. They may also be known as asset allocation funds.


BREAKING DOWN 'Hybrid Fund'

Hybrid funds offer investors a diversified portfolio. The term hybrid indicates that the fund strategy includes investment in multiple asset classes. In general it can also mean that the fund uses an alternative mixed management approach.

Hybrid funds are commonly known as asset allocation funds. In the investment market, asset allocation funds can be used for many purposes. These funds offer investors an option for investing in multiple asset classes through a single fund.

Hybrid funds evolved from the implementation of modern portfolio theory in fund management. These funds can offer varying levels of risk tolerance ranging from conservative to moderate and aggressive.

Balanced funds are also a type of hybrid fund. Balanced funds often follow a standard asset allocation proportion such as 60/40.

Target date funds or lifecycle funds also fit into the hybrid category. These funds invest in multiple asset classes for diversification. Target date funds vary from standard hybrid funds in that their portfolio portions begin with a more aggressive allocation and progressively rebalance to a more conservative allocation for use by a specified utilization date.

In all cases, hybrid funds will include some mix of two or more asset classes. In risk targeted and balanced funds, allocations will typically remain at a fixed proportion. In funds targeting a specified utilization date, the proportion of asset mix will vary over time. In all of the funds, the investment manager may actively mange the individual holdings within each asset category to respond to changing market conditions and potential capital appreciation opportunities

Investing in Hybrid Funds

Investment managers offer a wide range of options for hybrid funds. Below are two examples.

Vanguard Balanced Index Fund (VBINX)

This fund has a 60/40 balance among stocks and bonds. The stock portion of the portfolio seeks to replicate the CRSP US Total Market Index. The bond portion of the portfolio seeks to replicate the Bloomberg Barclays U.S. Aggregate Float Adjusted Index. The Fund has an expense ratio of 0.19%.

T. Rowe Price Retirement 2060 Fund (TRRLX)

The T. Rowe Price Retirement 2060 Fund is a hybrid target date fund. As of October 2017, it had 86% of the portfolio in stocks and approximately 11% in bonds. The Fund uses a fund of funds approach with 19% of the portfolio in a growth stock fund. The fund has an expense ratio of 0.74%.



 

BREAKING DOWN 'Hybrid Security'

Hybrid securities are bought and sold on an exchange or through a brokerage. Hybrids may give investors a fixed or floating rate of return and may pay returns as interest or as dividends. Some hybrids return their face value to the holder when they mature and some have tax advantages. Hybrid securities can be viewed as a form of esoteric debt and may be difficult to sell due to their complexity. 

Types of Hybrid Securities 

In addition to convertible bonds, another popular type of hybrid security is convertible preference shares, which pay dividends at a fixed or floating rate before common stock dividends are paid and can be exchanged for shares of the underlying company's stock. Pay-in-kind toggle notes are another type of hybrid security where the issuing company can toggle the payment from interest rates to additional debt owing to the investor, meaning the company owes the investor more debt but doesn't actually pay interest on it immediately. This interest deferral allows the company to keep cash flowing, but the larger principal payment may never come if the cash flow situation isn't resolved.  

Each type of hybrid security has unique risk and reward characteristics. Convertible bonds offer greater potential for appreciation than regular bonds, but pay less interest than conventional bonds and still face the risk that the underlying company could perform poorly and fail to make coupon payments and not be able to repay the bond's face value at maturity. Convertible securities offer greater income potential than regular securities, but can still lose value if the underlying company underperforms. Other risks of hybrid securities include deferred interest payments, insolvency, market price volatility, early repayment and illiquidity.

New types of hybrid securities are being introduced all the time in an attempt to meet the needs of sophisticated investors. Some of these securities are so complicated that it is difficult to define them as either debt or equity. In addition to being difficult to understand, another criticism of some hybrid securities is that they require the investor to take more risk than the potential return warrants. Hybrid securities are not marketed toward retail investors, but even institutional investors sometimes fail to fully understand the terms of the deal they are entering when buying a hybrid security

What is a 'Hybrid Annuity'

A hybrid annuity is a type of insurance contract that allows investors to allocate funds to fixed-rate and variable annuity components as part of the same investment vehicle. Most hybrid annuities allow investors to choose the how they want to allocate assets. Investors can skew their assets to more conservative, fixed-return investments that offer a lower but guaranteed rate of return, or weight them toward more volatile variable annuity investments that offer the potential for higher returns. 

BREAKING DOWN 'Hybrid Annuity'

A hybrid annuity gives investors more allocation options than a standard annuity. Their design allows a portion of an investor’s money potential to grow in a mutual fund sub-account while also providing guaranteed income in a fixed allocation. Other hybrid contracts may pair a fixed annuity with an indexed product in an effort to guarantee principal in both segments. Like all other annuities, hybrids can be immediate or deferred with fixed or flexible premiums.

Among their positives, hybrid annuities offer the possibility of increasing income with the growth portion of the contract, which essentially acts as an inflation hedge. Contracts with fixed and variable components also offer lower downside risk than a variable annuity. As for negatives, the dual framework adds complexity to these products, which is a deterrent for many investors lacking financial expertise. Many hybrid products also have high fees and charge schedules that clients may not account for at the time of purchase.

Another negative may be that hybrid annuities may be something of a misnomer, in that most annuities provide growth and income. Nearly all variable and indexed annuity products today come with guaranteed income riders and features that allow investors to lock in guaranteed income and upside potential, negating the attractiveness of hybrids.

Target Market for Hybrid Annuities

Hybrid annuities can be useful for those who have longer time horizons. In general, annuities are appropriate for investors seeking stable, guaranteed retirement income. Annuity holders cannot outlive the income stream, which hedges longevity risk. Notably, the lump sum deposited into the annuity is illiquid and subject to withdrawal penalties, so annuities are not recommended for investors who need liquidity. Some investors may look to cash out an annuity at a profit, though that is contrary to the investment strategy behind these products. 

As with any investment, an investor’s risk tolerance should be considered prior to purchases and subsequent allocation. Also, investors should understand the fees for the fixed and the variable portions of a hybrid annuity.



What is an 'Annuity'

An annuity is a financial product that pays out a fixed stream of payments to an individual, primarily used as an income stream for retirees. Annuities are created and sold by financial institutions, which accept and invest funds from individuals and then, upon annuitization, issue a stream of payments at a later point in time. The period of time when an annuity is being funded and before payouts begin is referred to as the accumulation phase. Once payments commence, the contract is in the annuitization phase.

Breaking Down 'Annuity'

Annuities were designed to be a reliable means of securing a steady cash flow for an individual during their retirement years and to alleviate fears of longevity risk, or outliving one's assets.

Annuities can also be created to turn a substantial lump sum into a steady cash flow, such as for winners of large cash settlements from a lawsuit or from winning the lottery.

Defined benefit pensions and Social Security are two examples of lifetime guaranteed annuities that pay retirees a steady cash flow until they pass.

Annuity Types

Annuities can be structured according to a wide array of details and factors, such as the duration of time that payments from the annuity can be guaranteed to continue. Annuities can be created so that, upon annuitization, payments will continue so long as either the annuitant or their spouse (if survivorship benefit is elected) is alive. Alternatively, annuities can be structured to pay out funds for a fixed amount of time, such as 20 years, regardless of how long the annuitant lives. Furthermore, annuities can begin immediately upon deposit of a lump sum, or they can be structured as deferred benefits.

Annuities can be structured generally as either fixed or variable. Fixed annuities provide regular periodic payments to the annuitant. Variable annuities allow the owner to receive greater future cash flows if investments of the annuity fund do well and smaller payments if its investments do poorly. This provides for a less stable cash flow than a fixed annuity, but allows the annuitant to reap the benefits of strong returns from their fund's investments.

One criticism of annuities is that they are illiquid. Deposits into annuity contracts are typically locked up for a period of time, known as the surrender period, where the annuitant would incur a penalty if all or part of that money were touched. These surrender periods can last anywhere from two to more than 10 years, depending on the particular product. Surrender fees can start out at 10% or more and the penalty typically declines annually over the surrender period.

While variable annuities carry some market risk and the potential to lose principal, riders and features can be added to annuity contracts (usually for some extra cost) which allow them to function as hybrid fixed-variable annuities. Contract owners can benefit from upside portfolio potential while enjoying the protection of a guaranteed lifetime minimum withdrawal benefit if the portfolio drops in value. Other riders may be purchased to add a death benefit to the contract or accelerate payouts if the annuity holder is diagnosed with a terminal illness. Cost of living riders are common to adjust the annual base cash flows for inflation based on changes in the CPI.

Annuities: Who Sells Them

Life insurance companies and investment companies are the two sorts of financial institutions offering annuity products. For life insurance companies, annuities are a natural hedge for their insurance products. Life insurance is bought to deal with mortality risk – that is, the risk of dying prematurely. Policyholders pay an annual premium to the insurance company who will pay out a lump sum upon their death. If policyholders die prematurely, the insurer will pay out the death benefit at a net loss to the company. Actuarial science and claims experience allows these insurance companies to price their policies so that on average insurance purchasers will live long enough so that the insurer earns a profit. Annuities, on the other hand, deal with longevity risk, or the risk of outliving ones assets. The risk to the issuer of the annuity is that annuity holders will live outlive their initial investment. Annuity issuers may hedge longevity risk by selling annuities to customers with a higher risk of premature death.

In many cases, the cash value inside of permanent life insurance policies can be exchanged via a 1035 exchange for an annuity product without any tax implications.

Agents or brokers selling annuities need to hold a state-issued life insurance license, and also a securities license in the case of variable annuities. These agents or brokers typically earn a commission based on the notional value of the annuity contract.

Annuity products are regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).

Annuities: Who Buys Them

Annuities are appropriate financial products for individuals seeking stable, guaranteed retirement income. Because the lump sum put into the annuity is illiquid and subject to withdrawal penalties, it is not recommended for younger individuals or for those with liquidity needs. Annuity holders cannot outlive their income stream, which hedges longevity risk. So long as the purchaser understands that he or she is trading a liquid lump sum for a guaranteed series of cash flows, the product is appropriate. Some purchasers hope to cash out an annuity in the future at a profit, however this is not the intended use of the product.

Immediate annuities are often purchased by people of any age who have received a large lump sum of money and who prefer to exchange it for cash flows in to the future. The lottery winner's curse is the fact that many lottery winners who take the lump sum windfall often spend all of that money in a relatively short period of time.