What Is Mutual Fund?
Most of you have certainly heard about the mutual funds and its benefits. And perhaps it is the ideal investment choice for most of the people. But there are still many people who don’t bear the proper knowledge about this amazing product of the financial market. So, in this section, we will briefly discuss what is mutual fund? Along with its definition, types, works, and advantages.
The most attractive part of the mutual fund is that it doesn’t take much knowledge to invest in it. And that is why it has become a very useful investment option for so many people. You just have to read this article properly and you will be able to gather the knowledge you need regarding it. Because of its simple nature and easy to invest policy the people find it very useful as a great and flexible investment option. Now let’s discuss this topic more sharply which will help you to accrue a complete knowledge about Mutual Funds. So, let’s start our discussion with the “Mutual Fund Definition”.
Mutual Fund Definition
Mutual Fund is an investment option which is generally managed by the big investment companies who collect a pool of investment from the investors. The Mutual Fund companies invest that money in different investment options like stocks, bonds, cash etc. These investments are handled by highly qualified individuals who work for these investment companies or AMCs. Most of these institutions use investment bankers to identify the proper investment source to increase the invested amount. So, in simple words, the mutual funds are like food recipe which contains many ingredients. And each recipe contains certain types of stocks and bonds or both which makes a unique mutual fund portfolio.
So, the person who is buying a mutual fund portfolio h/she is actually buying a bunch of stocks or bonds. But here you must understand that the investor who is investing in a mutual fund only has the right in that mutual fund security, but not in the stocks and bonds which are in that fund.
For example, if you buy a mutual fund portfolio which has the shares of Facebook then you don’t actually own the Facebook stock. So, by diversifying the investments a mutual fund also somewhat eliminates the risk factor included in the stock market. And this’s one of the key reasons that the people now have more trust in the mutual funds than the other investment options. If you are new to the financial market, then you will know that for the past couple of years the stock and bond market has not been able to fulfill people’s expectations. Especially the stock market has shown an increased rate of volatility because of which many people have lost money. You can see the stock exchange data to get a quick overview.
Advantages of Mutual Funds
In above we have briefly discussed the mutual fund definition which is enough to get a complete idea about what is Mutual Fund? Now we will discuss its advantages to know it better.
- Diversity: One of the main advantages of mutual funds is that it offers diversification. It is not wise to invest all your money in one place; an investor should reduce the risk by investing in various securities. The mutual fund gives that opportunity, a mutual fund security itself is a combination of many stocks and bonds. And an investor can easily diversify his investment through it. Plus, one doesn’t have to get in the headache of selecting multiple stock and bond options.
- Professional Management: Most of the AMCs only work with high-end clients who have much to invest. But the mutual fund managers are not like the AMCs they work hard to find the best investable options. So, the clients get the best service with a very low cost.
- Simple Structure: The mutual funds are very simple compared with the other investment options. Its professionally managed system doesn’t take any additional knowledge to invest in it. So, the people just need to have the basic knowledge about it.
- Accessible Investment: The mutual funds provide easy accessibility for any investor. A person with a 100$ can gain access to 100s of stocks by investing in one mutual fund. This creates a simple and accessible diversified product portfolio which can be used by anyone.
How Do Mutual Funds Work?
As we have discussed in the mutual fund definition the mutual funds are a very simple product of the financial market, but it completely changes when we come to the discussion of how do mutual funds work? The mutual fund companies are run by the board of directors and they hire a fund manager who is responsible for the whole process. The company is obliged to work for the best interest of the stakeholders.
The fund companies take fees from their customers for their services. These fees include annual operating fees and shareholders fees. The operating fees are charged when the investors buy and sell funds. And the Annual operating fees are charged yearly which is usually 1-3% of the asset. But it also includes 12b-1 fees and other exchange and administrative fees.
The mutual funds we usually see are mostly part of big investment companies like Vanguard Group and Fidelity Investment. It provides some additional level of support as they have a very significant network and trust in the market. But now many commercial banks are also offering mutual fund services which have raised the competition in the market.
Types of Mutual Funds
There are many types of mutual funds available in the market, but they generally come into two main categories the stock funds and the bond funds. They are furthermore dividable into many other categories. For example, the stock funds can be dividable into Large-cap, Mid-cap, and Small-cap category. And the bond funds can be dividable into Government Bond Funds, Municipal Bond Funds, and Corporate Bond Funds.
Then by depending on these types, it can also be categorized into other sections. For example, the Fixed Income Funds focus on the government and treasury bond to provide a fixed rate of return. The Index Fund is another type of mutual fund and considered to be the most useful method of mutual fund investment. The Index Fund manager just buy those stocks which represent the value of a stock index, such as the Dow Jones Industrial Average. It hugely eliminates the headache of finding and watching securities for the investment.
Many new types of mutual funds have also emerged in the market which is less expensive than the other funds. For example, The A shares charge a front-end load when purchasing which can vary from 2-7%. But the new T shares reduce much of these charges by making a limit to the broker’s commission.
Risks of Investing in Mutual Funds
As we have discussed in the mutual fund definition investing in mutual funds is much secure than other investment options. But even the safest method can sometimes create huge losses. But it’s very rare to consume losses over a 10-year period in a mutual fund. It usually gives an average of 5 to 10 percent return in a 10-year duration. But if you are only up for a 1- or 2-year period then things can get a little tough. The mutual funds can decline more than 40 percent within 1 year depending on the market. So, first determine whether you are in for a long time or short before investing in it. You can also read this article of The Best Mutual Funds to Buy in 2019.
So, in above we have covered every basic thigh about the Mutual Fund with a brief and clear Mutual Fund Definition which is enough to get a complete idea about this segment. Now you have to fathom every single step before investing in it. And here is our article about how to invest in mutual funds which will help you in your investment process.