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- Mutual funds are collective investment mechanisms, which are professionally managed and attract investors who seek to buy money market instruments, bonds, stocks, and other types of securities. Mutual funds have to be registered with the US Securities and Exchange Commission and managed by a board of trustees or board of directors, depending on whether the fund is established as a trust or corporation. The board makes sure that the fund operates in the best interest of the investors and hires service providers and a fund manager for the fund.
Mutual funds offer many advantages to investors, among which daily liquidity and diversification. These funds make it possible for investors to participate in investments that require considerable financing. In terms of diversification, mutual funds invest in a portfolio that contains a mixture of different securities. One fund may choose to combine stocks in the industrial and service sector as to reduce the negative impact of one type of security on the portfolio. In general, a diversified portfolio contains bonds, issued by different entities and with varying maturities, along with stocks from different sectors and with differing capitalizations. This can be very expensive for individual investors.
Investors who participate in mutual funds benefit from asset allocation and diversification without having to invest considerable amounts of money in an individual portfolio. It may not be enough to participate in one mutual fund in terms of diversification. You may want to check whether the mutual fund is industry or sector specific. For instance, if you invest in industry specific fund, it may spread investorsí money over twenty or fifty companies. However, if prices in this sector drop, the fundís portfolio is likely to be affected.
In principle, mutual funds represent open-ended funds which are run by investment companies, raising money from investors or shareholders. They invest in groups of assets in compliance with the fundís objectives, raising money through the sale of shares. Mutual funds sell shares similar to companies selling stocks to the public. This money is used to buy different investment instruments (e.g. bonds and stocks). Investors or shareholders invest in the fund and get an equity position in exchange for their money. With many mutual funds, investors can sell their shares whenever they want to. However, share prices fluctuate on a daily basis, depending on how well the fundís securities perform. While investors benefit from professional management and diversification, many mutual funds require a minimum investment and charge fees. At the same time, mutual funds offer convenience, liquidity, and choice to investors.
There is a large variety of mutual funds, among which balanced funds, global funds, clone funds, capital appreciation funds, and many others. An aggressive growth fund, for example, works to achieve the highest capital gains possible. Investing in such a fund is a good choice for investors who can take high risks in exchange for a potential high profit. Aggressive funds tend to produce bad results in times of economic downturn and good results with economic growth. A growth and income fund is another type of mutual fund which aims to offer income and growth by investing in businesses that have dividends and show earnings growth. International funds are such mutual funds that choose to invest in bonds of firms outside the United States. Finally, there are regional and sector funds as well. Regional funds will invest in one particular region of the world or in some country. Sector funds invest mostly or entirely in one sector and are hence less diversified. They are more volatile and riskier that the market, but the level of risk depends on the chosen sector.