As a financial analyst who has examined hundreds of fund portfolios, I can tell you mutual funds have surprisingly broad investment authority – but with important limitations. Let me break down exactly what’s allowed, what’s restricted, and how these choices impact your investments.
Table of Contents
Core Securities Held by Mutual Funds
Equity Securities
- Common stocks (primary holding for stock funds)
- Preferred shares (often for income funds)
- Depositary receipts (ADRs, GDRs for international exposure)
- REIT shares (real estate exposure)
Example: A large-cap growth fund might hold 95% common stocks of S&P 500 companies.
Fixed Income Securities
- Corporate bonds (investment grade and high-yield)
- Government debt (Treasuries, agency bonds)
- Municipal bonds (tax-free income)
- Mortgage-backed securities (government and private)
- International bonds (sovereign and corporate)
Example: An intermediate bond fund might hold:
Portfolio = 40\%\ Treasuries + 30\%\ Corporates + 20\%\ MBS + 10\%\ CashAlternative and Specialized Holdings
Less Common But Permitted Securities
| Security Type | Typical Fund Use | Risk Level |
|---|---|---|
| Convertible bonds | Balanced funds | Medium |
| Floating rate loans | Senior loan funds | High |
| Master limited partnerships | Energy sector funds | Very High |
| Closed-end funds | Fund-of-funds | Medium |
| ETFs | Some hybrid funds | Low-Medium |
Derivatives (Limited Use)
- Futures contracts (for hedging)
- Options (covered calls/protective puts)
- Swaps (interest rate/currency hedging)
Important: SEC Rule 18f-4 strictly limits derivatives exposure to protect investors.
What Mutual Funds CAN’T Hold
- Physical commodities (gold bars, oil barrels)
- Direct real estate (actual properties)
- Most private securities (unless registered)
- Cryptocurrencies (SEC currently prohibits)
- Unregistered securities (with few exceptions)
How Holdings Affect Your Risk
Concentration Risks
- Sector funds may hold >25% in one industry
- Global funds often have >50% international exposure
- High-yield funds concentrate in lower-rated bonds
Liquidity Considerations
SEC requires:
- 15% minimum in liquid assets
- No more than 15% in illiquid securities
Where to Find a Fund’s Holdings
- Annual/Semi-Annual Reports (complete holdings)
- Schedule of Investments (filed quarterly)
- Fund Website (top 10 holdings typically shown)
- Morningstar (aggregated holding data)
Pro Tip: Check holdings at least annually – many actively managed funds have 100% turnover every 2-3 years.
Why This Matters to Investors
- Tax Implications
- High-turnover funds generate more capital gains
- Municipal bonds offer tax-free income
- Risk Exposure
- Corporate bond heavy funds = higher credit risk
- International holdings = currency risk
- Performance Drivers
- Small-cap holdings increase volatility
- Treasury-heavy bond funds offer stability
The securities a fund chooses to hold ultimately determine 90% of its risk/return profile – far more than manager skill or market timing. As I often remind clients: “You’re not just buying a fund – you’re buying its underlying holdings.” Always look beneath the surface before investing.
