Alternative Investments Reclassified

Morningstar, NASDAQ, Investment CompanyMutual funds are automatically being reclassified without notifying the investors about their new status. This is due to the reclassification drive launched by the Investment Company Institute. You don’t need to worry about it though, as the action will have no negative consequences on the investor.

Investment Company Institute and its modernization

The Investment Company Institute is the trade association of the mutual fund industry. The event was the consequence of  “modernizing”  the investment-centric fund categorization system. The system was created by the ICI with the aim of helping the public understand trends concerning mutual fund investments. Reclassification of mutual funds is done by the institute regularly every 10-15 years.

Effect on investors

Categorical mutual fund changes will not directly affect the funds parked by the investors. Ratings agencies (for example Lipper, Morningstar (NASDAQ: MORN)) also have their proprietary fund classification systems. So, even if the ICI transfers a fund into another new category, it will reflect only the actions performed by the fund along with its permitted activities, as described by its prospectus. The new action will not help the management to start a new course of action without informing the investors.

The changes, however, mirror the new attitude towards fund business and these modifications will ultimately be adopted by investment advisers. Slowly but surely they will also trickle down to ordinary consumers. When older methods are subjected to “refinement”, they end up being marketed to consumers with an “improved” label on them. This is exactly what is happening with the mutual fund status.

According to the ICI’s previous classification system, the open end mutual funds were categorized into 33 varieties. The new system is made of 42 categories. Many new categories have been added alongside the existing bond funds. The most prominent change, however, reflected the emergence of so called “alternative strategy funds”.

Part of mainstream

Presently, the ICI has alternatives within its world equity, domestic equity, bond and hybrid categories. This means that the alternatives are now officially part of the mainstream funds. The consequence of such a reclassification will be that investors will find an increasing number of such ideas on their plate , which is bad as the label can be misleading.

According to the majority of investors who have been in this business for a long time, an alternative investment is one which is not a stock, a bond or cash. Alternative investments usually mean precious metals like gold, real estate and a few commodities. Investors should keep in mind that such investments may end up losing money just like “mainstream” investments.

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