Mutual funds are professionally managed funds that provide professional money management companies to make decisions for investors in an investment plan. These investment plans include buying and selling securities at the best time, usually when prices of these securities are low and when they will offer the best return on investment.
Mutual funds pool money from several different investors and use that money to purchase a range of different stocks, bonds, or other securities.
Types of mutual funds
There are four main types of mutual fund categories:
- Cash/money market funds
- Bond/fixed-income funds
- Stock/equity funds
- Speciality or sector equity funds
Understanding these category differences will help one choose the right type of mutual fund for their needs.
Cash/Money Market Funds
A cash or money market fund contains only cash or near-cash instruments, such as T-Bills, certificates of deposit, and other short-term debt instruments. These low-risk funds are typically used by people who want a safe investment because these types of funds do not fluctuate in value or yield very high returns.
However, money market funds have a much higher interest rate than a savings account because the money is invested into debt securities, which carry risks just like any other type of security.
Bond/Fixed Income Funds
A bond fund invests in bonds from companies or government entities that offer periodic interest payments to investors. The returns on these may vary depending on the economic climate and performance of the company issuing them. Still, they provide lower-risk investments for individuals seeking stable portfolios without many fluctuations in return amounts. Depending on the investors ‘ income tax filing status, these funds can be further divided between taxable and tax-free bond funds. Stock/Equity Funds
Stock or equity funds
Stocks or equity funds contain:
- A pool of investments in tiny businesses.
- Companies that have yet to go public.
- Securities from larger companies that are traded outside of a major stock exchange.
These types of investments yield very high returns for investors and carry a great deal of risk because they can lose value quickly if the company goes under. Because of the enormous potential gains from these types of investments, individuals looking to make their money grow faster usually invest in stocks instead of other more stable investment products.
Speciality/Sector Equity Funds
A speciality or sector fund is a type of mutual fund which invests exclusively in securities related to specific real estate, technology, or other business sectors. These funds are typically very risky because they invest in smaller companies instead of well-known names like Starbucks Corporation. However, they can also provide high returns for individuals with a high tolerance for risk and knowledge of the fund’s sector.
Benefits of mutual funds
One benefit of mutual funds is that they provide a more diversified portfolio than if the investor had purchased all of the securities independently. In this situation, an investment in each security would be too small to create enough diversity for adequate diversification. The cost of placing trades could be higher with a high number of small transactions. A mutual fund allows the investor to achieve a properly diversified portfolio with just one trade.
Another benefit is that mutual funds allow the investor access to professional money management and financial advice, which can be extremely valuable for someone with less expertise or time than an expert would have.
Summary
Mutual funds offer investors access to large pools of investments without having to research every individual security themselves. Mutual fund investment is not suited for everyone; however, most novice investors begin their careers learning about mutual funds so they can decide which type best suits their needs before moving on to more complex forms of investing later. Mutual funds are a great way to begin investing in the stock market with proper due diligence and education. Contact a reputable online broker from Saxo Bank and get their address here.
