April 19, 2024

Business Bib

Business & Finance Blog

Basic Insights about Mutual Funds You Should Know Today

3 min read

A mutual fund is an investment vehicle that’s made up of a pool of money collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments, and other assets.

Mutual funds are operated by professional money managers, who allocate the fund’s investments and try to produce capital gains and/or income for the fund’s investors. A mutual fund’s portfolio is structured and maintained to match the investment goals stated in its prospectus.

How Mutual Fund Companies Work

Mutual funds are virtual companies that buy pools of stocks and/or bonds as recommended by an investment advisor and fund manager. The fund manager is hired by a board of directors and is legally obligated to work in the best interest of mutual fund shareholders. Most fund managers are also owners of the fund, though some are not.

There are actually very few other employees in a mutual fund company. That investment advisor or fund manager may employ some analysts to help pick investment or perform market research. A fund accountant is kept on staff to calculate the fund’s net value (NAV), or the daily value of the mutual fund that determines if share prices go up and down.

 Mutual funds need to have a compliance officer or two, and probably an attorney, to keep up with government regulations.

Most mutual funds are part of a much larger investment company apparatus; the largest have hundreds of separate mutual funds.

Kinds of Mutual Funds

Mutual funds are divided into several kinds of categories, representing the kinds of securities the mutual fund manager invests in.

Fixed-income

One of the largest of these funds is the fixed-income category. A fixed income mutual fund focuses on investments that pay a fixed rate of return, such as government bonds, corporate bonds, or other debt instruments.

The idea is the fund portfolio whips out a lot of interest income, which can then be passed on to shareholders.

Index funds

Another group falls under the name “index funds.” The investment strategy is based on the belief that it is very difficult and often expensive to try to consistently beat the market.

So the index fund manager simply buys stocks that correspond with a major market index like the S&P 500 or the Dow Jones Industrial Average. This strategy requires less research from analysts and advisors, so there are fewer expenses to eat up returns before they are passed on to shareholders. These funds are usually designed with cost-sensitve investors in mind.

Balanced funds

Balanced funds invest in both stocks and bonds with the goal of minimizing risk of exposure to one asset class or another. Another name for this type of mutual fund is “asset allocation fund.”

An investor may anticipate finding the allocation of these funds among asset classes relatively unchanging, though it will differ among funds. Even though their goal is asset appreciation with lower risk, these funds carry the same risk and are just as subject to fluctuation as other classification of funds.

Other Types of Mutual Funds

  • Money market funds
  • Sector funds
  • Equity funds
  • Alternative funds
  • Smart-beta funds
  • Target-date funds
  • Funds-of-funds

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