A mutual fund is an investment tool that is made up of pool of money collected from investors for the purpose of investing in securities like stocks, bonds, money market instruments and other different assets. Generally, the funds allocated in mutual funds are handled by professional money managers, because they have a good amount of expertise in the field and they will help their investors with producing capital gains or income for the fund’s investors. The mutual fund’s portfolio is structured and maintained for matching the investment objectives of the investors. Mutual funds provide small or individual investors the access to professionally managed portfolios of equities, bonds and other securities. Hence, every shareholder participates in the gains or losses of the fund. The investment advisor or fund manager may employ analysts for helping pick investments or performing market research. A fixed income mutual funds focuses on investments that will pay a fixed rate of return like government bonds, corporate bonds or different debt instruments.
Once an investor completely understands what is mutual fund, and the different functionalities of it, they would not have a problem in investing in mutual funds by themselves. Mutual fund units, or shares can be easily purchased or redeemed as needed at the fund’s current net asset value (NAV). A fund’s NAV is derived by dividing the complete value of securities in the portfolio by the total amount of shares outstanding. The value of the mutual fund company will depend on the performance of the securities it decides to buy. When an investor buys a share of mutual fund, they are actually buying the performance of the portfolio. Mutual funds can be as simple as buying or selling stocks or bonds online. Investors can also sell out their shares whenever they want or need.
Different types of mutual funds:
1. Equity funds:
These funds are invested in equity stocks or shares of companies. They provide a higher result, which is why they are considered high risk funds.
2. Debt funds:
Debt funds are invested in debts like government bonds and fixed income assets. Since they fixed returns, they are safe investment instruments.
3. Money market funds:
These funds are invested in liquid instruments, they are considered a safe investment option, since the investors will get an immediate yet moderate returns on their investment. They are perfect for investors who want to invest their abundant funds.
4. Hybrid funds:
These type of funds are invested in different asset classes. Through these funds, the returns and risks strike a perfect balance.
5. Index funds:
They are investment instruments which represent specific index on the exchange for monitoring returns and movement of index.
Swarali Chavan is a finance professor. In her free time, she reads upon and studies about market investment instruments. She has spent considerable time researchingwhat is mutual fund. In this article, she has given detailed information on why mutual fund is a good option.