What to Know About Mutual Funds
Mutual funds are a very common type of investment option, especially for casual investors who are not interested in micromanaging their securities but simply want to set money aside to grow. A mutual fund can invest in nearly any type of business or resource across the world through a variety of instruments, usually including both stocks and bonds. The fund acts as a pool of investor contributions, using these contributions in varied investments and distributing the returns based on how much each investor puts into the fund.
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Mutual Fund Purposes
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The primary purpose of the mutual fund is to make it easy for investors to diversify, investing in many different instruments at the same time and with very little effort. This greatly reduces risk for the investor because short-term fluctuations in the market rarely affect all investment areas and instruments equally, minimizing losses caused by day to day variations. A mutual fund is also often flexible, allowing investors to invest anywhere from several hundred dollars to millions.
Mutual Fund Specialties
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Mutual funds may use a variety of instruments, but they do not invest in all areas equally. There are myriad investment sectors and mutual funds that specialize in each one. First, funds can specialize in a particular area of the world or nation. Funds can also choose a particular industry or several similar industries to invest in. Funds also often choose a particular size of business to invest in or businesses with a particular type of financial standing.
These specialties are usually referred to by specific names. Large cap funds focus on large businesses, often with high net worth, while small cap funds specialize in smaller, growing corporations. Value funds are designed to invest in relatively cheap companies compared to their performance, but growth funds try to find companies that are expected to quickly expand within the next several years. Blue-chip funds aim for highly stable investments with nearly guaranteed returns but little volatility. Government bond funds aim for even more security by investing solely in Treasury bonds.
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Active and Passive Funds
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Mutual funds can be either passive or active. This is not necessarily a specialization so much as it is a fund philosophy. Active funds seek to grow faster than the investment market as a whole, taking greater risks in an attempt to gain greater returns, especially over the short term. These funds are more ideal for aggressive investors. Other funds are passive, linked to indexes such as the lists of major companies trading on the NYSE, offering lower costs and more stable growth, but with less of a chance to make profit as rapidly.
Popular fund indexes include the S&P 500, a collection of the top 500 equity trading companies in the United States, and the Vanguard 500 Index, which aims at a broader section of the market than the S&P. Some funds may even mimic stock exchanges like the NASDAQ, which trades with over 3,000 companies. These mutual funds all seek to invest in the same companies as the indexes, at the same proportions, in order to exactly track their growth rates.
Mutual Fund Management
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Mutual funds are managed by banks, investment firms and other financial organizations. Mutual fund managers, often with the help of sophisticated software, choose what instruments to invest in and when and when to sell them. Investment firms are often owned by larger investment companies, which are in turned owned by even larger firms, creating a financial maze that can sometimes be difficult to navigate.
Investors should carefully study the history of the fund itself and the fees that the fund manager charges when considering mutual fund investment. Many funds require an extra commission fee for every fund transaction. These are known as "Load" funds, while "No-Load" funds do not have sales commissions and put more decisions in the hands of the investor. When studying the history of a fund, investors should always keep in mind that investment markets are constantly evolving, and past performance is never a guarantee of any future returns.
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