What is a mutual fund?
A mutual fund is a type of investment strategy that collects money from multiple investors and invests it into securities like stocks, bonds, short-term debt, etc.
Mutual funds are professionally-managed and can be sold to the public. When investors buy mutual funds, they usually buy into a shared pie of different assets that make up the mutual fund.
- Affordability: Mutual funds usually have low monetary value for first investments and later purchases.
- Diversification: If one company fails, there will be many other companies or industries to bounce back on. This decreases the risk factor that comes with placing all investments into one company. TIP: Before choosing a mutual fund, it’s beneficial to pinpoint how it fits with your investments and any financial goals you may have
- Liquidity: Investors can redeem their shares at any given time for the net asset value value and any redemption fees.
- Professional Management: Fund managers will do the research for you.
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- Fees: Even if the fund has poor returns, you still have to pay for sales charges, fees, and other expenses.
- Transparency: While it is beneficial to have the fund managers research for you, you will not necessarily have control over some specific decisions made by these managers.
- Pricing: The prices to redeem shares depends on the fund’s net asset value.
Types of Mutual Funds
|Type of Mutual Fund||Features|
|Money Market Funds||Relatively low risk. Can only invest in high-quality, short-term investments by US Corporations & federal, state, & local governments|
|Bond Funds||Higher risk than money market funds; Aim to produce higher returns|
|Stock Funds||Invest in corporate stocks; Growth funds: Stocks that have potential for above average financial gains; Income funds: Stocks that pay regular dividends; Index funds: Track a particular market index; Sector funds: Specialize in a particular industry segment|
How to buy and sell
Mutual fund investors buy shares from the fund itself or through a broker. In other cases, funds would be bought from other investors. Investors pay for the fund’s Net Asset Value per share, plus any other fees that they would have to pay, such as sales loads.
Mutual funds are redeemable, so investors can sell shares back to the fund when they need to. Usually, this refund is sent back within seven days. It is very important to read the prospectus very carefully before buying any funds. This would give information about all expenses, risks, performance, and general objectives.
Make sure to check that the investment adviser is registered with the SEC before investing! This reduces the risk of fraud.