What Are Mutual Funds?

Mutual funds are professionally managed investments that pool money from investors for investment in stocks, bonds, and other types of securities. A fund manager has the responsibility of trading the pooled money and managing the fund toward its stated objective.

Investors purchase shares from the fund itself or through a broker instead of from other investors on a secondary market (like the NYSE). The combined holdings the mutual fund company owns are its “portfolio”, with each share representing an investor’s proportionate ownership. Just as stocks trade at specific prices, mutual funds have a price associated with them called the Net Asset Value (NAV).

Benefits of Mutual Funds

Many investors see the main advantages offered fund investing (over individual stock ownership) in diversification and professional management. For the most part, there is only a low minimum investment required for an investor to get into a fund.

Potential Disadvantages

But mutual funds are not without their disadvantages. For example, unless it is a “no-load” mutual fund, investors pay sales charges and other fees, regardless of how the fund performs. The investor also cannot control the decisions made by the fund manager regarding the components of the fund and there is an element of price uncertainty as the funds’ NAV is calculated once a day, typically after the markets are closed (by contrast, investors can obtain real-time quotes for individual stocks).

The Three Main Types of Mutual Funds

1. Equity funds primarily invest in stocks, which historically have carried the highest risk while offering the greatest return. The risks associated with equity funds are similar to those of stock investing.

Equity Funds can further be classified into equity diversified (which can invest in any stock from any sector) and equity sector (which focus on stocks within a particular sector).

2. Debt-based funds primarily invest in bonds, treasury bills and government and corporate issued securities. Debt-based funds typically carry lower risk but do not offer the investor the same opportunity for return as equity funds.

3. Balanced Funds invest in both stocks and debt instruments in an effort to deliver maximum return while minimizing risk.

More Information: What Are Mutual Funds?

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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