How to Understand Mutual Funds
Understand mutual funds by beginning with the definition of a mutual fund, and then going on to understand the different types of mutual funds.
A mutual fund is a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt.
The combined holdings of the mutual fund are known as its portfolio. Investors buy shares in mutual funds. Each share represents an investor’s part
ownership in the mutual fund and the income it generates.
What Are Mutual Funds Used For?
Mutual funds are investments that are generally long-term investments that are used for general savings, retirement savings, and college fund savings.
Mutual funds are purchased because they are professionally managed, diversified investments, an affordable investment, and liquid.
Some have upfront fees to purchase and or sell called loads. Some have no-loads, but all have yearly management fees from as low as .2 to 8%.
I prefer fees less than 1% with no-loads. There are good mutual funds that fall into all categories.
Mutual funds make money when dividends are paid, usually every 3 months to every 12 months. Capital gains are usually every 12 months. Mutual funds also make money when the NAV value of the fund increases. The NAV is the Net Asset Value of the mutual fund, similar to the price of a single share of stock.
There are many types of mutual funds within these nine types of mutual funds. Here are the 9 different major types of mutual funds. The risks of mutual fund investing runs the gamut of very low to very high and many levels in between within one type of fund. Do your research thoroughly before investing in order to understand mutual funds.
I have invested in mutual funds for at least 30 years now, and they have served me well.
The 9 Different Types of Mutual Funds:
1. Allocation Mutual Funds
Risk: Low to Medium
Allocation funds are a combination of stock and fixed income securities and are subject to the risks involved in each of these security types. Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. In general, the bond market is volatile and fixed income securities that carry the interest rate, inflation, price volatility
and other risks.
2. Alternative Mutual Funds
Risk: From Low Risk to High
The fund may invest in securities that may have a leveraging effect (such as derivative and forward-settling securities) which may increase market exposure, magnify investment risks, and cause losses to be realized more quickly.
The commodities industry can be significantly affected by commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions.
4. International Equity
Risk: Medium to High
Foreign markets can be more volatile than U.S. markets due to increased risks of adverse issuer, political, market, or economic developments, all of which are magnified in emerging markets. These risks are particularly significant for funds that focus on a single country or region.
Make absolutely sure your budget is in order before you begin to understand mutual funds and start investing.
5. Money Market Mutual Funds
Risk: Very Low
A money market mutual fund is a type of fixed income mutual fund that invests in debt securities characterized by their short maturities and minimal credit risk. You could lose money by investing in a money market fund. An investment in a money market fund is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency. Before investing always read a money market fund’s prospectus for policies specific to that fund.
6. Municipal Bond Mutual Funds
Risk: Very Low to Low
The municipal market can be affected by adverse tax, legislative or political changes and the financial condition of the issuers of municipal securities. Interest rate increases can cause the price of a municipal bond to decrease.
7. Sector Equity Mutual Funds
Risk: Medium to High
Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. Sector funds can be more volatile because of their narrow concentration in a specific industry.
8. Taxable Bond Mutual Funds
Risk: Very Low to Medium
In general, the bond market is volatile, and fixed income securities carry interest rate risk. As interest rates rise, bond prices usually fall, and vice versa. Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.
9. U.S. Equity Stock Mutual Funds
Risk: Low to Medium
Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal.
You will understand mutual funds when you begin with understanding the different types of mutual funds.
Lois Center-Shabazz | Course Delta Agency
Personal Finance: Author, Blogger, Course Creator, Money Strategist
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