What is a Mutual Fund?

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A mutual fund is a financial institution formed by money from many investors which in turn invests that money in diverse securities such as money markets instruments, bonds, stocks, etc.

Mutual funds are treated like other investment entities and are managed by professional managers. Individuals and investment companies can buy shares in a mutual fund and become shareholders. By owning a mutual fund, you proportionally share profits and losses with other shareholders. A combination of all investments held by a mutual fund form its portfolio and it is managed according to investors’ objectives and needs form their investments

Examples of mutual funds

The following are a few examples of mutual funds. Some of these funds have other funds under management.

Pimco Total Return (PTTAX).Total assets: $327.6B
Dimensional Fund Advisors. Total assets: 375B
The Vanguard Group. Total assets: $3.4T
Fidelity Investments. Total assets:1.9T
The American Funds. Total assets: 1.6T
T. Rowe Price. Total assets. 582.9B
Black Rock. Total assets: 494.7B

Should I invest in a mutual fund?

There are millions of people in the world who are investing in mutual funds. It may not be the best investment option, but it offers a lot of benefits. Do you want to invest the money yourself? If you have the skills, time, and experience, you can do it. However, if you don’t know what takes place in the financial world, you may need to invest your money in mutual funds.

The following are few reasons why investing in mutual funds could be a good option for you.

Professional management. Investing in a mutual fund means that you will not have to do research for yourself. Professional managers will do research for you. The only thing you will do is to accept rewards or losses from the investment.

Liquidity. Liquidity is a term used to define how fast an asset can be transformed into ready to use cash. For example, a stock is more liquid than a house. When you own a mutual fund, you can sell your holdings whenever you want. This gives you access to capital if you need it.

Affordability. Mutual funds do not require a lot of money to start your investment. The initial investment could be different depending on the services they provide, profitability, historical performances, etc.

Diversification. Asset allocation is one thing mutual funds are good at. Investments they make are diversified in many sectors at the best protection level possible. Having your money in a mutual fund could be one way to protect yourself against market turmoils.

Capital gain. Investing in mutual funds gives you a chance to grow your money slowly or faster depending on the growth of your mutual fund(s). If assets owned by your mutual fund appreciate, you will receive some of these gains once assets are sold.

You will collect dividends. If your mutual fund invests in stocks that give dividends, you will receive a share of these dividends. Keep in mind that expenses will be deducted from total income before dividends (if there are any) are distributed.

Types of mutual funds

Money Market Funds. These types of funds are considered safer or risk-free and they are short term. They are usually offered by the government and returns are low. Your return will be a little above what you can get from a savings account and less than a certificate of Deposit (CD).

Bonds funds. Bond funds are riskier than the money market and tend to produce more returns than the money market.

Stock funds. These funds invest their money in corporate stocks.

Target date funds. These funds invest the money in diverse investments such as stocks and bonds and they can change these investments over time.

Risks of investing in a mutual fund

Loss of your money. It is possible that you will lose your money if your mutual fund(s) fails to produce profits. This is true for every investment. You must expect these possibilities when you choose the investment route.

Volatility. As the value of assets your fund owns fluctuate, the value of your investment will fluctuate as well. This volatility in the market forces many investors to sell their holdings in an attempt to reduce losses.

Dividend payments will not be consistent. As companies’ revenues and earnings decrease or increase, their dividends follow the same trend. Companies offer dividends or stop them depending on how well they are doing. You may receive fewer dividends or none due to changes in dividend payments from stocks your mutual fund owns.

source: forbes,investmentnews, investor.gov,investopedia