What is a Mutual Fund?

Mutual Fund is an investment fund made up of a pool of money collected from many investors to invest in securities like bonds, stocks, money market instruments, and other assets which as usually manage by professional money managers attempt to give more income for the investors.

Understanding of MF?

It gathers money from the public or investors where this money goes to buy other securities, usually stocks and bonds. The performance of the securities will determine the value of the mutual fund company which is mainly focused on the amount of unit or share is bought by the buyers. However, unlike stock, mutual fund shares do not give its holders any voting right but it allows to invest in many different stocks.

Mutual funds invest in a vast number of securities to reduce to risk of money loss and performance is usually tracked as the change in total market capitalisation. The average mutual funds hold over a hundred different securities, which means shareholder holds a huge diversity of securities and effecting on one security won’t much affect the overall value of mutual funds which give better returns at a lower risk.

Types of Mutual Funds:

Its types are categories into different kinds targeting different securities and the types of returns they look for.

1.Equity Funds:

We will briefly talk about this fund like what it does and its benefits. This is also called stock funds because it invests principally in stocks. Mutual funds will buy a share from companies and financial institution on behalf of you and return you get mainly depends on what kinds of share you have invested in. Which means you will become the shareholder of such companies and financial institution. However, here it has a higher risk with the higher return so there are no fixed limits to its return.

Its benefits:

  • More return: It usually give more returns than any other funds. It can give return 12-15% on average and high as 20% as possible per annum depending on shares.
  • diversification: This funds will invest in varieties of securities around 100 different stocks. Say you have invested $15 in an equity fund. They will invest $15 into 100 different securities. If you have invested individually into those securities, it would have cost more than $30.
  • professional expertise: Those who have no knowledge about such, they provide professional aid to where and when to invest to gain maximum returns.
  • tax benefits: Unlike other investment, the profit you gain in return won’t need to pay tax. Hence equity funds are most tax-efficient investment.

2.Fixed-Income Funds:

It’s an investment approach which mainly focuses on again set rate of income where it usually includes investment like government and corporate bonds, CDs, and money market funds.

This can offer a steady stream of income with fewer risk, unlike stocks. It mostly buys undervalued bonds in order to sell them at profit but the risk is dependable on where they invest because all bonds funds are subject to interest rate risk, which means that if rates go up, fund value goes down.

3.Index Funds:

The funds which track a market index, such as the S& P 500 are known as index funds which use passive investing strategy, which means, the aim is to produce returns similar to an investments index. However, Index funds usually deliver returns that are slightly lower than an index due to fees associated with these funds.

4.Balanced Funds:

These funds usually stick to a relatively fixed mix of stocks and bonds in a single portfolio. These funds a balanced between equity and debt which reduce the risk of exposure across asset classes. This is sometimes also called asset allocation fund because the fund that invests in different asset class must remain within the set value.

5.Money Market Funds:

These funds are one of the safest investment because they mostly invest in liquid securities where it gives returns within a short amount of time which lead to lower risk. These funds can be used as a place to part money temporarily before investing elsewhere and they are not suitable for long term investment.