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Sick and tired of exploring specific stocks?
Maybe you're a greenhorn when it comes to business, finance, investments, and markets?
Or perhaps you are a pro who wants to know more things about our topic – mutual funds.
For this article, it doesn't matter – because this article is going to teach you everything about mutual funds – what are they, their characteristics, and how can you benefit?
What Is A Mutual Fund?
According to Investopedia – “A mutual fund is an investment vehicle made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets“.
No doubt, mutual funds are an investment option that is very suitable for both amateurs and professionals. It has become really quite common in recent years due to the increasing desire of individuals to invest. Most experts define it as a pool made up of money which was collected from many different investors. These “pools” have a manager who takes care of the investments and aims to ensure capital gains.
Diversity is the key
The idea of mutual funds is that they provide diverse investments — in stocks, bonds, and cash — without forcing investors to make individual purchases and trades. If you are an individual who would like to build his portfolio, you would need a large sum of money to achieve that. This is where mutual funds come. both open-end funds and close end funds offer investors a wide range of investment opportunities – dividend stocks, bonds, securities.
Low minimum investment
Even after the burst of the stock market bubble in 2000, more than half of U.S. the households owned stocks, mainly through mutual funds.
There is no “minimum investment amount” and it depends on the fund you choose – but most of the funds require at least 1000$ as a minimum investment. As of 2017 – US citizens have invested more than 12$ trillion dollars in 10,000 different kinds of mutual funds.
Mutual Funds Objectives
As you already know, mutual funds are professionally managed by managers who have the responsibility to set the fund's objectives. Baruch Silvermann has already written a great article on the different types of mutual funds.
However, funds undertake different strategies depending on their goals, which is a way to classify them.
Mutual Funds Common Types
Funds With An Aggressive Growth Strategy
This type of fund is aggressively buying stocks which might gain value quickly and substantially, therefore tries to achieve a high return. Of course, this is a risky venture.
Generally, stock promising high returns in the near future is volatile and unstable, and during a potential economic decline, they might lose their value rapidly. Usually, investors who are ready to lose money prefer this type of strategy.
Growth Strategy Funds
This strategy is quite similar to the first one – the fund aims at achieving high returns. The difference is that the investors' portfolio is much more diverse – the fund invests in small but also in large companies as well in new and risky ventures but also in stable ones at the same time.
One should always keep in mind that there are also risks associated with this type of investment. On the whole, this strategy ensures a medium to long-term commitment and perspectives.
Usually, these are mutual funds that invest in fixed-income securities. This is particularly suitable for the elderly because this investment will give them a stable and predictable income. The portfolio primarily contains securities, obligations, and bonds.
Is it completely safe?
No. When interest rates rise, income these funds share prices go down.
Also known as balanced funds, they employ both growth and income strategies.
If you are not strictly focused only on income and want to have potential growth, this is your type of mutual fund. These funds purchase securities thus offering a regular income, however, investing in stocks give the potential for long-term growth.
Money Market Funds
According to many, these funds are the safest option. Their primary objective is to maintain their share prices low and follow the principle “don't lose money.” Usually, money market funds invest in debt securities with very minimal risk.
Nevertheless, inflation will eat up the buying power over the years when your money is not keeping up with inflation rates (See the best “plan: B’s” to the money market ). They are, however, highly liquid so you would always be able to alter your investment strategy. Negative interested rates also pose a serious threat to this fund.
Advantages Of Mutual Funds
There are many reasons why to put your money in mutual funds. Investment in mutual funds depends on the personal preference of the investor and many investors still prefer to dig in and find specific stocks/bonds for investments. However, mutual funds offer some great advantages:
Simple And Convenient
Many people who decide to invest do not have the background, the knowledge or the necessary resources to do so (See the best ways to start learning to invest for beginners). Once you invest, there are professionals who take care of the fund's future strategy and investment – they do your research and investment policies, and you have time for other personal projects (See 10 great methods for beginner traders)
Mutual funds are one of the most accessible options investors have. Don't worry if you have just 50USD, you can join in a mutual fund, you have access to two many different can invest in hundreds even thousands of individual securities at once.
If you want to have a diverse portfolio, definitely mutual funds are for you. They invest in various stocks, bonds, securities.
One of them does not achieve the desired results? Well, you have hundreds or thousands of other securities from which you can profit. There are mutual funds that offer complete diversification with just one security.
Wide Range Of Investment
You remember that according to a fund's objectives there many different types of mutual funds. Some would like to aggressively purchase high-risk securities. There are also lifecycle funds (the so-called income funds) to secure your days after retirement
In addition to that, mutual funds are focused on many different areas of the market; they are not strictly limited to technology or energy sectors for example. This is also something that can contribute to an investor's portfolio diversification.
There's no denying that there are some disadvantages and risks associated with mutual funds. For example, though it's convenient and is quite an attractive opportunity, you have no control over your investments. Once in a fund, the manager will do what they think best.
Despite that, mutual funds are very simple, easy to use and convenient for individual investors. In addition, they are affordable (50USD and you are in) and offer you the chance to create a diversified portfolio. For example, if you wish to achieve that on your own, it would perhaps take you a long period of time and a great deal of money.
On balance, it's safe to say that mutual funds are a great investment opportunity, especially for people who feel like fish out of water when it comes to markets. When investing in mutual funds, a person should always set his goals first and think carefully about what kind of strategy they would like to employ. Then it's simple, you just find the right fund for you and go ahead.