What is Mutual Funds:-
A mutual fund is a basket of various investments, such as stocks, bonds, and cash. A mutual fund is funded by the investments of individual investors and institutions.
Types of Mutual Funds
Equity funds
invest in stocks of various sizes and domicile. For example, there are mutual funds that are classified as global, which have the ability to invest in both the U.S. and anywhere in the world..
Fixed-income funds
mainly invest in bond-oriented investments, such as corporate bonds and municipal bonds. You may come across a municipal bond mutual fund that is state-specific.
Money market funds
invest in high-quality, short-term debt instruments, such as government treasury bills (also known as T-bills). The returns on money market funds have historically been greater than savings and checking accounts but less than certificates of deposits
Benefits of Mutual Funds
Diversification.
Mutual funds spread their holdings across a number of different investment vehicles, which reduces the effect any single security or class of securities will have on the overall portfolio. Because mutual funds can contain hundreds or thousands of securities, investors aren’t likely to be fazed if one of the securities doesn’t do well.
Expert Management.
Many investors lack the financial know-how to manage their own portfolio. However, non-index mutual funds are managed by professionals who dedicate their careers to helping investors receive the best risk-return trade-off according to their objectives.
Liquidity.
Mutual funds, unlike some of the individual investments they may hold, can be traded daily. Though not as liquid as stocks, which can be traded intraday, buy and sell orders are filled after market close.
Convenience.
If you were investing on your own, you would ideally spend time researching securities. You’d also have to purchase a huge range of securities to acquire holdings comparable to most mutual funds. Then, you’d have to monitor all those securities. Choosing a mutual fund is ideal for people who don’t have the time to micromanage their portfolios.
Reinvestment of Income.
Another benefit of mutual funds is that they allow you to reinvest your dividends and interest in additional fund shares. In effect, this allows you to take advantage of the opportunity to grow your portfolio without paying regular transaction fees for purchasing additional mutual fund shares.
Range of Investment Options and Objectives.
There are funds for the highly aggressive investor, the risk averse, and the middle-of-the-road investor – for example, emerging markets funds, investment-grade bond funds, and balanced funds, respectively. There are also life cycle funds to ramp down risk as you near retirement. There are funds with a buy-and-hold philosophy, and others that are in and out of holdings almost daily. No matter your investing style, there’s bound to be a perfect fund to match it.
Affordability.
For as little as $50 per month, you can own shares in Google (NASDAQ: GOOG), Berkshire Hathaway (NYSE: BRK.A), and a host of other expensive securities via mutual funds. At the time of this writing, a share of Berkshire Hathaway costs over $119,000 a share.
Are Mutual Funds Right for You?
Considering that there are more mutual funds on the market than there are individual stocks, the chances of finding one right for you are high. That said, mutual funds are most appropriate for people who don’t have the time or inclination to be heavily involved in managing an investment portfolio, and don’t mind paying an annual expense ratio to have a professional do it for them. They’re also ideal for people who simply can’t afford the level of diversification that most funds offer.
Still, if you seek diversification, but not necessarily professional management, index funds with their low expense ratios may be a good fit.