Understanding Mutual Funds

Mutual funds is a collection of funds pooled from Investors and managed by a professional fund manager. The objective, nature are usually specified in the brochure of these funds. In general they can offer one a great opportunity to invest in the financial markets without having to go through all the rudiments of learning and analyzing financial instruments.When Buying  Mutual funds you are going to pay a commission called Load . This can be paid upfront as a Front-End when buying the  Mutual Fund and or as a Back-End when selling the fund shares. Mutual Funds are usually traded on an exchange though some are privately owned

WHAT ARE THE DIFFERENT TYPES OF MUTUAL FUNDS?

By Ownership

A mutual fund may be Open-Ended or Close-Ended. A Close-Ended mutual fund. 

• An Open-Ended fund has no limitation to the number of membership. Hence anybody can buy their shares. The values of this funds are close on demand at their net asset value, or NAV. 

• A Close-Ended fund has a specified number of membership. This Mutual funds are not that common as that of the Open Ended fund. They don't reflect the real value of the instruments in the fund and are usually traded at a discount. 

By the Nature of traded Instruments

There are many kinds of instruments that can be used to comprise a fund. These are the most common.

 

1.Money market funds

These funds comprises of money market instruments such as treasury bills, and other short term low risk investments. Their returns are primarily derived from interest rates hence they are affected by inflation and interest rate changes. You can buy these funds if you have much are averse to high risk.

2. Fixed Income funds

These funds as the name suggest come from fixed income investments such as government and corporate bonds. Like Money market funds their returns are primarily from interests however they also comprise of long term bonds hence their price and returns vary and are slightly more riskier than money market funds.

3. Equity funds

These funds comprises of stocks (also known as shares) they are more riskier than the first two and obtain their return primarily from capital gains. Additional may also come from dividends. Their risky nature implies they are more likely going to give you more return than the first two mentioned.

4. Index funds

These funds aim to track the performance of a specific index in the financial market. Examples such indexes are S&P 500 and Dow Jones. The performance of these funds will largely depend of the ability of the fund manager to track the index that constitutes his portfolio.

5. Balanced funds

These funds invest in a mix of equities and fixed income financial instruments. The fund manager attempts to balance risk by investing in bonds and equity by adjusting the percentage of the investor funds he allocates to each market. If you want a diversified portfolio you can opt for this kind of mutual fund.

6. Specialty funds

These funds are more varied in nature. They comprise of real estate investments, commodities etc and is suitable for someone that truly wants a completely diversified portfolio without having to invest in different funds. 

7. Fund-of-funds

These funds comprises of other kind of funds. The fund manager simply invests in other mutual and exchange funds. As a result they are thoroughly diversified. They beauty of this fund is you own several mutual and exchange funds by simply buy shares of one. 

WHAT ARE THE BENEFITS OF INVESTING IN A MUTUAL FUND?

Diversification

As mentioned already the major benefit of having a mutual fund is that it allows you to diversify without having to buy all those instruments yourself. Diversifying reduces your exposure to a particular market segment hence enhances the probability that your investments will stand the test of time.

Professional Management

Fund Managers are usually professionals trained to identify and manage portfolio of investments. They understand the market better than the investors hence are more likely going to make a better decision than the investors. Mutual funds practically provides professional management at no extra costs. This is quite huge given that the professional services are usually very expensive.

Ease of Investment

Mutual funds allows for easy investment by allowing you to buy multiple investments without having to incur repeated cost from commission and spreads when buying them differently. By buying a share of a Mutual fund you have completely avoid many rigorous modalities.

Liquidity

Mutual funds are quite liquid (i.e they can be easily sold or bought). Therefore they are very handy should you be in dire need of cash.

WHAT ARE TYPICAL RETURNS FOR A MUTUAL FUND?

The return from a mutual fund is closely tied to the nature of the instruments contained in the portfolio. However, for majority of Balanced mutual funds you can expect returns ranging from 10% to 30% annual returns.

HOW CAN I INVEST IN A MUTUAL FUND?

To invest in a mutual fund you need to sign up with a brokerage company that offers the Mutual fund you are interested in buying. You will have to evaluate the fund or have a broker do it for you at a fee before making the final decision to buy.