Mutual Funds-An Introduction
Mutual funds are common investments that many people have in their portfolios. Despite their prevalence, many people do not understand them. In this article, we will give you a comprehensive introduction to mutual funds.
What are Mutual Funds
Mutual funds are a type of investment. They are made when a company pools money from investors to purchase a variety of securities like stocks and bonds. These holdings are the portfolio. Each investor has fractional ownership in the fund and shares in income that the fund generates.
Mutual funds can be closed-ended or open-ended. Closed-end funds only release a set number of shares to the public during an initial public offering. Open-end funds do not have a set number of shares, they issue new shares as necessary.
Types of Mutual Funds
There are many different types of mutual funds. Each one has different portfolio objectives and holdings. Some of the main types of funds include:
- Equity Funds: Most mutual funds are equity funds. Their portfolios consist of stocks. They are split into subcategories, typically named after they type of company they invest in (small-cap, mid-cap, or large-cap) or the investment approach they take (i.e. aggressive growth, income, or value).
- Fixed Income Funds: These funds create portfolios that generate income that the shareholders benefit from. Typically, they will invest in government bonds, corporate bonds, or other debt instruments that generate set rates of return.
- Index Funds: This type of mutual fund buys stocks that mimic the performance of major indexes like the S&P 500.
- Balanced Funds: Balanced funds invest in stocks and bonds so as to try to reduce risk.
- Money Market Funds: These are low-risk funds that mainly invest in high-quality short-term debt instruments. Though they carry low risk, they also offer low returns.
- Income Funds: Income funds mainly invest in government and high-quality corporate debt. By holding them to maturity, they provide a steady income for shareholders.
- International/Global Funds: These funds invest in only assets that are based outside of your country of residence.
Mutual funds are popular investments because of the benefits that they offer. These benefits include:
- Professional Management: Managers continuously manage the portfolio which includes doing market research and buying/selling securities.
- Diversification: By purchasing one share you are buying part of a portfolio that is invested in a range of investments. This can give you a level of diversification through the purchase of just one investment, which can help to reduce your risk.
- Multiple Ways to Earn Income: They offer three different ways to earn income. These include dividend payments, capital gains distributions, and an increase in net asset value.
Like all types of investments, mutual funds do carry risks. There is always the risk that market conditions can change and cause the value of the securities in the portfolio to go down. Additionally, market changes can also affect dividends and interest payments. Remember that a fund’s past performance does not predict future returns.
Investing In Mutual Funds
If you have an interest in investing in mutual funds you should meet with a qualified investment advisor. They can help you to pick funds that match your risk tolerance and time horizon. They can also help you to understand the fees and income each fund provides.
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