What is a Mutual Fund?

In the simplest terms, a mutual fund is a portfolio of managed stocks or bonds, or both. It is a company which brings together several groups of people and invests, on their behalf, money into a portfolio. Each investor then owns shares within the mutual fund, and this represents a small portion of its overall holdings.

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When you invest in a mutual fund, it is a lot different to investing in stock shares. Unlike stock shares, a mutual fund’s shares are representative of investments in several different stocks instead of just one stock, bond or holding. In addition to this, a mutual fund does not provide its investors with any voting rights in companies.

There are several mutual funds advantages and they are well worth looking into if you wish to begin investing or diversifying your current portfolio.

#1: Types of Mutual Fund

There are several types of mutual fund and it is important to understand that each of these types have a different risk/reward factor. Generally speaking, the higher your potential returns are from a mutual fund, the higher your risk of loss.

Three of the more common types of mutual fund are:

  • Income Funds which provide investors with a steady and regular income, and this is their sole purpose: to provide a steady cash flow to those who invest in them. Investors in income funds usually invest into corporate and government debts.

  • Bond Funds are actively involved in investing and trading in various bonds. They are managed actively and their purpose is to buy bonds at a low price and sell them on for a profit, and are likely to return more money as a result.

  • Balanced Funds are a safer option and provide income and capital appreciation alongside a safety net. Balanced funds invest in fixed incomes and equities at a 6:4 ratio.

#2: Picking a Mutual Fund

With so much choice far exceeding the above, choosing a mutual fund can seem dizzying.

The best strategy is to always pick a mutual fund that best reflects an investment strategy with which you are familiar with or have dabbled in previously. This will reduce the inherent risk and provide you with the opportunity to learn about mutual funds in depth, whilst still benefitting from having invested in one. When you are ready, you can invest in other types of mutual fund.

#3: Finding Mutual Funds

Thanks to the internet, finding mutual funds has been made very easy. All mutual funds companies have their own websites and so by simply searching Google, you can unearth a whole host of different providers.

There are even mutual fund “search engines” that can help you track down the perfect one for you. The likes of LipperLeaders and MAXFunds are trusted online services and have been helping normal people track down and invest in mutual funds for years.

If you are looking to invest in something, it may be worth considering a mutual fund if you want to diversify your portfolio with minimal effort.