Mutual Funds

Mutual funds are investment groups of like-minded investors, managed by a single entity. A mutual fund typically consists of several hundred to several thousand individual investors. A mutual fund can have several million dollars in stock and commodity assets, depending on the mutual fund type. Mutual fund investment differs from typical stock investment in many ways but primarily in that the investor owns shares in the fund itself, and not the financial instruments it consists of. Mutual funds will in most instances focus on a sector of the market, such as commodities or technology related stocks, however some mutual fund investment portfolios will cover a vast area of investment distribution in many different and distinct sectors.

Advantages To Mutual Fund Investing

Partaking in a mutual fund offers the investor many advantages over typical stock investment. Mutual funds pool not only investors, but their capital also. This increased buying power strengthens the mutual fund as a whole and enables it to capitalize on market trends and investment opportunities. With a mutual fund the investor will also enjoy professional management by a mutual fund manager. These managers make the bulk of their commissions based on the performance of the mutual fund. In this way they are highly motivated and usually very successful at guiding their mutual funds towards gains for their shareholders. Mutual funds are required by law to make annual or semi-annual payments to their investors based on the profit made by the funds investing activities. Mutual funds also have a tendency to protect individual investors from single stock losses as one might face in a personal stock portfolio with direct stock ownership. When a mutual fund invests in multiple sectors across the board, from commodities to companies, even other funds, it builds in a protective hedge against single sector loss. If a single component such as gold or a specific company falls in value, the overall mutual fund’s portfolio will almost always cushion against these sector losses. In conclusion, a mutual fund provides expert management in stock investment and protective investments measures against single sector performance.

Types Of Mutual Funds

Mutual funds come in many forms to appeal to the varied interests of the investors they wish to attract. The major mutual fund types used currently in the market are:

Open-end Funds: open-ended funds are defined as typical mutual funds. These mutual funds issue new shares to investors wishing to join the fund on any given trading day. They are required to register with SEC (Securities and Exchange Commission, US) and be structured similarly to a corporation or business trust. Open-ended funds must also be ready and able to buy out investors who wish at any time to leave the mutual fund.

Closed-end Funds: similar in every characteristic to an open-ended mutual fund except these funds are only offered at a single time for investment from the public. Much like companies issuing a one-time investment, such as an initial public offering (IPO), closed-end funds have one opportunity to attract investors. After that point they in most cases cannot look to include new investors and grow in size, but rather trade shares on the secondary markets.

Equity Funds: Equity mutual funds are the most common type of mutual funds in the United States, accounting for 50% of all mutual fund investment in the marketplace. Being an equity fund simply is defined as having the majority of the fund’s investment in typical corporate stocks.

Exchange Traded Funds (EFTs): Exchange traded funds are mutual funds which are most often invested in using brokerage firms and offer the investor advantages such as a simple tax structure, low overhead costs, and stock-similar features. Most EFT’s are hinged to major indices and typically trade at an amount equal to their combined asset value.

Bond Funds: Bond mutual funds comprise 18% of the market share of the overall mutual fund marketplace. A bond fund is typically sub-categorized into a specific bond fund type based on it’s primary method of investment ranging from more common government issued bonds to even high-yield bond focused mutual bond funds.

Money Market Mutual Funds: Money market funds manage approximately 26% of the overall mutual fund investment market. Money market mutual funds are focused on low risk and liquidity. Similar to COD’s (Certificates of Deposit) they offer predictable and safe returns with a share price which in most cases will always be $1.00. Unlike COD’s however, money market fund shares can be liquidated, exchanged for cash during any time the marketplace is open without penalty.

Fund of Funds (FoF): Fund of fund mutuals invest in other mutual funds. Meaning the shares which comprise the FoF are simply shares held in a few to several other major mutual funds of varying types. A fund of fund exists to protect the individual investor even more than the natural incubation from loss a mutual fund provides by allowing a double barrier against single sector loss. Additionally fund of fund mutual funds offer low-cost management fees as there is little oversight needed in guiding these funds towards lower, yet predictable profit increases.

Investing In The Right Mutual Fund

Every investor contemplating mutual fund investing should do some research on their specific needs, expectations of profits, and willingness to pay management fees. As stated previously, most mutual fund management fees are based on results. In this way in most cases any money paid to management oversight of a given mutual fund will be compensated with increased profits. This however is not always the case so one should do a cursory if not in-depth review of both a fund’s past performance but also it’s policies for fee structures.

In most cases the decision by an investor to pursue mutual fund investment is a wise one. Over historical trading periods on average mutual funds obtain higher returns for their shareholders than individual investors can get on their own. It is recommended that while not all of one’s stock investment portfolio need be invested in mutual funds, a healthy stock portfolio should at a minimum consist of 25% investment in this securities sector.