What Is a Mutual Fund?

A Mutual Fund a collection of stocks, bonds, short-term money market instruments, and/or other securities managed either by a professional fund manager. The collection of stocks is usually varied between industries and is based on strong research and analysis by an investor.

The mutual fund will have a fund manager that trades the pooled money on a regular basis. The net proceeds or losses are then typically distributed to the investors annually. Mutual funds have several distinct ways of making a profit for an investor. Income from dividends, capital gains from the sale of securities and fund holdings increases.

There are many types of mutual funds including, balanced fund, blend fund, global fund, corporate bond fund, capital appreciation fund, crossover fund, equity fund, growth fund, growth and income fund, hedge fund, income fund, aggressive growth fund, index fund, closed fund, international fund, municipal bond fund, regional fund, sector fund, specialty fund, stock fund, and tax-free bond fund.


Advantages of Mutual Funds

Diversification

Diversification serves as both an advantage and disadvantage for Mutual Funds. Mutual funds can help an investor diversify their portfolio with a minimum investment, spreading the investment over several stocks. This means that if one stock fails to perform, loses are not as severe as if all investment had have been with that particular stock. This diversification is also achieved by investing in several sectors or industries. This also serves to reduce part of the risk of investment

Professional Management

Mutual funds are managed and supervised by investment professionals. Professional Fund Managers follow the stated objectives of the fund and research and analyse on strategic factors including where and when to invest, which industries and sectors to invest in; which will provide the best returns for mutual fund investors.

Convenience

Mutual Funds reduce the tasks involved in buying and selling, and research and analysis of stocks and other instruments. This convenience means an investor simply has to evaluate which fund to choose.

Minimum Initial Investment

The minimum initial investment for many Mutual Funds is very low, this entices investors as returns are usually higher than standard bank rates. It gives even small investors a chance to broaden their investment portfolio.


Disadvantages of Mutual Funds

Diversification

The disadvantage of diversification is that if one stock in a fund is a breakout performer, then the return will not be as high, due to diversification. Diversification reduces risk but also limits potential of high moving stocks.

Cost

Professional Management is not free in the financial world. As with all professionally managed corporate bond funds there are costs related to the initial investment to a yearly management fee ranging from 1-3% as well as sales commissions, 12b-1 fees, redemption fees, and operating expenses.

Risk

Unlike corporate bond funds which pay back the initial principle, there is no guarantee with mutual funds. Share Prices and Fund Yields fluctuate, and have no guarantee against loss of investment.