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Are MLP mutual funds more or less risky than a traditional mutual fund? - By: Jim Knight

A traditional mutual fund is nothing more than a collection of stocks and/or bonds. Mutual fund is a company that brings together a group of people and invests their money in stocks, bonds, and other securities. Each investor owns shares called units, which represent a portion of the holdings of the fund.

A MLP mutual fund is not different from a traditional mutual fund, except that its portfolio consists of a collection of energy infrastructure Master Limited Partnerships (MLPs) which the advisers believe will provide substantial long-term capital appreciation through distribution growth and an attractive level of current income. Since these MLPs have traditionally had stable incomes owing to their extensive contracts and toll road model, it is expected that MLP mutual funds will follow suit.

Risks concerned in MLP Mutual Funds

1.Market Risk
2.Issuer Risk
3.Diversification Risk
4.Industry Specific Risk
5.MLP Risk
6.MLP Tax Risk
7.Liquidity Risk
8.Reliance On Advisor

MLPs do not pay US federal income tax at the partnership level. Rather, each companion is allocated a share of the partnerships income, gains, losses, deductions and expenses. On the opposite, if the fund manger of a mutual fund sells securities, capital gains tax is triggered, which can be mitigated by incurring investments in tax-sensitive funds or by holding non-tax susceptible mutual fund in a tax-deferred account, such as a 401(k) or IRA.

A MLP fund focuses on the energy infrastructure sector, with an absolute significance on securities issued by MLPs which creates small diversification compared to household mutual funds, where contrary asset classes and companies from a variety of sectors are combined into one fund.

MLPs trade on the NYSE, the NASDAQ National Market, and AMEX. Certain MLP securities may trade less often than those of larger companies due to their smaller capitalizations. This may make liquidity problems for investors. But in case of a traditional MF, just like an individual stock, it allows the investor to insist on that his shares be converted into cash at any time.

The investment of MLP fund in less actively traded securities or those that familiarity decreased trading volume over time may regulate its capability to take gain of market opportunities adjust of securities in an crisis. This may adversely influence the funds proficiency to fabricate dividend distributions as well. Traditional mutual funds do not have such problems as all the securities in their portfolios are truly many times traded, allowing the fund manager to take improvement of any circumstances necessitating fast selling or buying.

Costs affected in both MLP and traditional mutual funds are not that discrete. MLP mutual fund annual charges are between ranges of 1.25% - 1.5% compared to traditional MFs 1.3% - 1.5%. Only in occurrence of abroad mutual funds are the fund charges a bit higher than those mentioned above.

MLP mutual funds have not even completed a single year of operations, in fact not even a full quarter, whereas traditional mutual funds have been there for a extensive time. If we take liquidity, diversification and past fulfillment into compassion, traditional mutual funds do have the edge at the instant. However, with their target on fixed returns even in the most volatile of financial climates, it is sole a situation of time until MLP mutual funds begin attracting investors in droves.

About the Author

For more information to invest in master limited partnerships, visit our website.

Article Directory Source: http://www.articlerich.com/profile/Jim-Knight/78197




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