Different Types Of Mutual Funds

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There are so many choices for investors when it comes to mutual funds. Which is great because investors do not have to settle on investments which almost meet their financial goals and risk levels. They can find a mutual fund that is a customized fit to their investment style. In the northern hemisphere alone, there are over 10,000 mutual funds available that investors can choose between. There are more funds then stocks. Each type of mutual fund has its own level of growth, risk, and rate of return. In addition, each fund has already established investment goals, industries, and investment techniques. There are three basic types of mutual funds – equity funds, fixed income funds, and money market funds.

Money market funds are usually short term investments. Money market funds are similar to Treasury Bills. This is an extremely safe investment and there is almost no risk associated with investment in money markets. This is perfect of the investor who has an aversion to risk. However, remember with little risk come a small rate of return. A good way to balance that is to put a larger sum of money into a money market fund. The rate of return is usually double what a typical savings account would give you.

Income funds offer its investors a regular income usually paid out in the form of monthly dividends. This is why this type of investment is called a fixed income fund. The investment is usually in debt management of the government or large corporations. Most people who invest in income funds are investors who are extremely conservative or people in their retirement years. Income funds have a higher rate of return then money market funds but they do carry more risk with them.

Balance funds offer the investors just the right mix of income, low risk, and appreciation. The goal of this type of fund is to invest in a combination of all types of stocks to achieve a balanced and profitable investment portfolio. Most financial experts suggest that balance funds should be 60% equity and 40% income.

Equity funds are what most people think of when they hear the term mutual fund. This type of investment is long term and the goal is to slowly increase capital over a number of years. As retirement approaches more equity funds allow the investor to draw an income each month from the fund.

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How Mutual Funds Work

Mutual funds are good options for American investors to meet their financial goals. These funds offer professional management and diversification of the funds invested. Mutual funds assets in 1990-2000 rose from 1.065 trillion to a whooping 6.965 trillion dollars. 10% Americans owned funds in 1980 and by 2000, the percentage increased to 49%.

What are Mutual funds?

A company dealing in mutual funds invests the money of several investors in bonds, stocks, securities, assets and several other short-term money-market instruments. The combined ‘holdings’ owned by the mutual fund are known as its portfolio. When you invest in a mutual fund you become a shareholder of the company. Each share in a mutual fund company is the representation of he investor’s proportionate ownership of the fund holdings and the income generated. You earn dividends when the mutual fund company earns a profit, however, your shares will decrease in value if it faces a loss. A professional investment manager does the buying and selling of securities for the growth of the fund.

Types of mutual funds:

Equity funds: These funds involve only common stock investments. They can earn a lot of profit, but are also very risky.

Fixed income funds: They include corporate and government securities. These funds offer fixed returns at a low risk.

Balanced funds: This is the combination of bonds and stocks with a low risk. However, the investment does not earn a lot through these funds.

How it works?

Mutual fund shares can be purchased from the company itself or a broker. There are secondary market investors also, like the New York Stock Exchange. Per share net asset value of the funds or NAV is the price that you pay for buying a mutual fund share. It also includes the shareholder fee that is imposed by the fund, at time of purchase. The best feature of mutual funds is that these shares are ‘redeemable’. You, as an investor, can sell your shares back to the broker. In order to accommodate new investors, mutual fund companies generally create new shares and sell them. They keep selling their shares continuously till they become large. Investment advisers act as separate entities and are responsible for managing the investment portfolio of the mutual funds. Investing in mutual funds tends to lower the risk factor because they are the result of diverse investments. Since someone else manages your investments, you need not worry about keeping constant tabs on the investment, though a periodical check enhances your personal book of accounts. Managing funds is the full time job of the fund manager and he is responsible for the performance and health of the investment.

The rate of returns in mutual funds is based on the increase or decrease of the value, during a specific period. Returns of a fund indicate the track record. It is important to remember that the past performance cannot guarantee future results.

As in the case of any investment or business, mutual funds also have risks associated with the returns. It is essential to set your financial goals and requirements, before investing in a mutual fund.

Joe Kenny writes for the UK Loans Store offering UK secured loans and offer more information on UK mortgages and other loan topics available on site.

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