What Do You Need To Know About Mutual Funds?
If you are a first-time investor or a senior citizen reaching retirement, it would be advantageous to look into purchasing mutual funds. Mutual funds are investment vehicles that are developed and managed by professional fund managers. They normally consist of a number of stocks, bonds, securities, and commodities that are diversified to the extent that any losses are offset by gains in other areas. When purchasing a mutual fund you become a member of a pool of investors. This makes it possible for you to buy into the program with a comparatively small amount of money, and have professionals control and invest your money without you having to watch the financial markets yourself.
A mutual fund is commonly referred to as a portfolio, and a portfolio is maintained and supervised by a portfolio manager usually supported by a research team. Their goal is to seek out the best investment opportunities and take advantage of them. Your money is pooled with that of other investors and used to purchase the selection of securities that will be included in the mutual fund. All financial gains or losses are divided among the investors in varying amounts depending on how much each one has invested.
Mutual funds can be invested in a wide variety of securities, thus allowing the investor a diversity that he likely would not achieve without the combined wealth of the mutual fund. The total value of all the securities in a portfolio is known as the net asset value (NAV). Like the stock market, the NAV fluctuates at the end of each business day.
There are a large number of different types mutual funds. Some of the most popular types are listed below:
An open-end fund can be added to or redeemed at any time, investors can buy or sell shares at NAV prices. There is no fixed maturity date. Open-end funds keep your investment liquid.
Money market funds are also a liquid asset. This type of portfolio is very safe since it invests in short-term investments such as Treasury Bills, Certificates of Deposit and other cash equities. Their purpose is to preserve your capital investment with moderate returns. This, plus easy access to your money, is its main purpose.
Equity/Growth funds invest primarily in stocks with the objective of long-term capital growth. They are better intended for investors who invest for longer periods and who are not afraid to take a higher risk.
A Debt/Income fund is basically a long-term version of a money market fund. This type of fund invests in bonds, government securities, and the money market, in general. These funds are normally less of a risk than Equity/Growth funds.
Balanced funds tend to be a combination, a mix, if you will, of the equity and income funds described above. It is intended for long-term investors interested in a combination of income and moderate growth. These funds will usually hold about 60% in Equity and 40% in Debt investments.
Mutual funds are a smart financial move for the small investor. You can purchase most funds for as little as $2,000 and a monthly addition of $50 a month. You will be buying a number of diverse shares, usually a hundred or more. This enables the small investor to purchase a larger portfolio than he could manage on his own.
The benefits of investing in mutual funds are many. In addition to the professional management and diversification as described above, you’ll find that, unless they have they have a specific lock-in period, they are very liquid. Any funds withdrawn will usually be received in no more than a couple of days. You can even get automatic withdrawals scheduled in many cases.
You can make your investments even more diverse by investing in more than one mutual fund. Perhaps a money market fund, an open-ended fund, and a balanced fund, for example.
Mutual funds, because of their volume of business, usually have lower transaction costs, and these lower costs are passed on to the investors. And investors are kept up to date with annual reports and other fact sheets. And be assured, mutual funds are regulated and held accountable by the U.S. Securities and Exchange Commission (SEC).
As with any investment, there are some risks involved. But because of their diversification, mutual funds are among the most secure financial instruments. Some funds, depending on their focus have lower returns than others. And these figures can vary depending on the market or some other influence.
Another thing to remember: you have no control over the composition of your portfolio. Only the management team can pick the securities they invest in.
If you want to find the best income mutual funds, do your homework. Research a number of mutual funds. Study their literature and their track record. It’s the best way to pick a winner.
Damian Wolf is a successful entrepreneur and financier with 10 years investment experience in Australian and US capital markets. Also, he loves to write articles about business and finance, with an accent on investment opportunities and saving money in business. Damian is a proud father and husband who loves sports and travelling.