A mutual fund collects investors money and makes multiple types of investments called portfolios. The different types of investments are money market funds, bonds and stocks.
A professional investment manager manages the mutual fund. He buys and sells securities so that the growth of the fund is confirmed. Those who invest in the mutual funds are called “shareholders” of the mutual fund company. In case there is profit, the shareholders earn dividends. Whenever there is loss, the value of the shares fall down. Mutual funds are made up of many different investments. They are in a way diversified. This lowers the risk of investment in mutual funds. However, the shareholder need not worry about diversifying the investments or maintaining a record about them. Somebody else does this work for the shareholder. The shareholder has simply to buy the shares and forget about them. However, this cannot be looked up as a good technique as the individual’s money is in somebody else’s hands.
The fund manager’s compensation is decided upon the fact how well the fund performs. Thus, the shareholders can be assured that these would work nicely to ensure the fund works out well. Managing the funds is the full time job of the fund manager.
Mutual funds are of two types – open ended and closed ended. Open ended implies that shares are issued in the fund or sold back to the fund when anyone wants them. Closed ended implies that only a specific number of funds can be issued for a particular fund or can be sold back to the fund when the fund terminates. These closed ended funds can be sold to other investors on the secondary market.
When a mutual fund is purchased, the sales charges associated with it is called as a Load. These load charges are given to the fund salesperson as a payment and commission for their research services. The load charges can be up to 8.5 percent of the selling price. If it is paid when the mutual fund is purchased, it is called as a front end load. If it is paid when the mutual fund is sold, it is called as a back end load.
Most of the mutual funds are no load funds. This implies that the fund is directly marketed and any sales fee is not charged. Due to the amount of information on the Internet, it is simple to make correct choices without the aid of a salesperson.
Any mutual fund can be classified into three categories – Equity funds, Fixed income funds and Balanced funds. Equity funds consists of investments of only common stock. These involve more amount of risk, but can earn more amount of money than other types. Fixed income funds consist of government and corporate securities. These are low risk investments and ensure a fixed return of money. Balanced funds mix stocks and bonds in the investment pool. There is low to moderate risk involved. Before the person invests the money, it must be decided how much risk he is willing to take. Low risk also means lower rates of return of money.