Mutual Fund Basics
Imagine if different investments were pooled into one large fund that you and other investors could own. Now imagine if a team of professionals manages that investment portfolio on your behalf. Does an investment like that even exist? Yes, it does, and it’s called a mutual fund.
Mutual funds have been around for decades. They allow multiple investors to buy investments without the investors having to manage each of the assets themselves. Your money is combined with money from other investors. That money is then used to buy or sell different investments. Each investor owns a portion of the mutual fund’s total holdings and benefits as the fund’s overall value increases.
Here is a list of the most common mutual funds.
Bond Mutual Funds: A bond is commonly referred to as a fixed-income investment. They are provided by corporations, state and federal governments, municipalities, and cities. Think of them as loans where you lend the bond issuer (government) money that they agree to pay you with interest.
While the interest rate isn’t very high, you at least have the comfort of knowing that you won’t lose any money. A bond mutual fund buys multiple types of bonds. It’s considered an extremely safe investment with above-average returns.
Stock/Equity Mutual Funds: Owning stock in a company is like owning part of the company. The more stock you own, the more of the company you own. A stock or equity mutual fund buys stocks from multiple companies and corporations.
The value of the stocks will fluctuate. As they do, the value of the mutual fund fluctuates. However, the goal is to see the mutual fund’s value increase over time. This type of investment is a little riskier than a bond fund, as the value of investments can rise or fall throughout a given year. However, if you take a long-term view, you will see consistent yearly returns.
When stocks are doing well, this type of investment generates higher returns than any mutual fund on this list.
Balanced Mutual Funds: A balanced fund invests in fixed-income investments, such as bonds, and equity investments, like stocks. While the mixture between the two is typically 50 percent, the fund manager will adjust that percentage based on how the market is performing. If stocks rise, the fund will increase the amount of stock it owns and vice versa.
The allure of balanced mutual funds for investors is that they can benefit from fixed-income and equity investments.
Money Market Mutual Funds: Money market mutual funds are another type of fixed-income investment. They have the lowest volatility of any of the mutual funds on this list. This fund invests in short-term securities and liquid assets like Treasury bills or commercial paper. It is ideally suited to risk-averse investors who want investment security and are willing to accept a very low-interest rate.
There are all kinds of investors. Some are comfortable taking risks, while others are risk-averse. Some are completely new to investing, while others have been at it for years. Regardless of what type of investor you are or your experience, a mutual fund is a must-have in your investment portfolio.
When choosing a mutual fund, make sure to understand your risk tolerance. Your chosen investment firm can help you make that all-important decision.