Investing in a mutual fund can be very beneficial for someone who is looking to save money for their retirement or to make a big purchase down the road such as a house, a car or higher education.
Mutual funds could improve your income and savings if you’re a wise investor, but many people don’t have a good grasp on what they are. It can prove favorable to know some of the different types of mutual funds and how they can be advantageous.
What Are Mutual Funds?
A mutual fund is an investment tool that is used as a pool of funds from a group of investors.
This pool is maintained by professional money managers, who invest in stocks, bonds and other securities in an attempt to create income for the investors.
What’s interesting about mutual funds is that they attempt to include many different types of investors. These investors purchase shares either directly from the fund itself or through a broker. The assets and revenue gained from the mutual fund eventually come together to make up a collection of investments called an investment portfolio.
Those who have a share of the fund have a percentage of ownership in the portfolio.
The Advantages of Mutual Funds
Mutual funds are in demand today because there are many advantages that can benefit investors.
Many people who invest in mutual funds do so in part because it is an easily accessible way to diversify your investment portfolio. This is beneficial because it reduces the amount of risk in an investment security. Having a diverse portfolio can be viewed as hedging your bets, or not putting all of your eggs in one basket.
If someone has investments in different industries, then their portfolio could be viewed as diverse, but if someone puts all of their wealth into similar industries, it could be detrimental if those industries fall on hard times.
Another benefit of investing in a mutual fund is that it is managed by a professional money manager who can lead the investors in the right direction when it comes to making tough decisions about what to invest in.
Mutual funds are also enticing because they are usually not expensive to invest in, especially when you compare them to buying investments without a group of investors.
Types of Mutual Funds
Mutual funds can become complicated because there are over 15 different types to choose from. Among the more popular mutual funds are fixed income funds, money market funds and equity funds.
Fixed Income Funds
Fixed income funds give a return on investment using payments periodically.
When you invest in a fixed income fund, the payments that you’ll receive are known in advance. The investments pay a return on a fixed schedule. For example, if you invest in a bond that is at a 7% fixed rate, a $2,000 investment would earn you $140 per year.
Fixed income funds can be seen as bonds and are used to have a steady and consistent stream of money coming into the fund.
Money Market Funds
Money market funds are known for investing in securities such as government bonds and treasury bills. While this type of investment generally has a lower risk than other types, it can also provide a lower return.
A money market fund’s goal is to gain interest for investors, and they are worth one dollar per share. Ideally, it’s a safe place to invest assets that are cash equivalents (U.S. Treasury bills, banker’s acceptances, bank certificates of deposit, etc.).
Money market funds are usually used as a short-term investment because of the low returns that they bring. There are no entrance or exit fees in money market funds, which makes them appealing to investors who are looking for a short-term, safe place to put their investments.
Equity funds (also known as stock funds) are basically investments in stocks for businesses.
The returns on these investments are based on the performance of the businesses themselves. This kind of fund is one of the riskier funds because it is dependent on the share market.
Equity is basically the value of an asset minus the value of liabilities (or debts).
Equity funds are good for someone who wants to build wealth over a longer period of time but doesn’t mind investing in shares that can be risky.
The Disadvantages of Mutual Funds
Although there are many benefits to investing in mutual funds, there are also some drawbacks.
One of the biggest drawbacks is that there is no insurance against losses that you might have as an investor. The Federal Deposit Insurance Corp. (FDIC) does not insure mutual funds.
Additionally, since the mutual funds have multiple people in them, the professional manager decides which securities to buy and sell. This could be a burden to people who may have to buy a security that might not be optimal for them.
Some mutual funds may simply be too big to get a great investment, and although mutual funds include smaller investments, the fees and expenses for these investments could quickly add up.
All investments have advantages and disadvantages. Some of the bigger factors to consider when working with mutual funds are the degrees of risk, fees and expenses, as well as tax consequences.
If handled correctly, mutual funds can be a great way to gain assets and diversify your investment portfolio.
Investments may seem like a daunting task initially, but they can have great long-term benefits for your financial health. If you invest wisely and understand the risks involved in each investment, the upside can be great.
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