Can mutual funds give you better returns, are they safer investment choice, what are types of mutual funds? Read all here.
By Guy Avtalyon
A mutual fund is a company that puts together money from many people and invests it in stocks, bonds, or other assets. The investment portfolio of a mutual fund is a combination of stocks, bonds, and other assets. When an investor acquires shares of the fund becomes the owner of the part of these holdings.
Mutual funds investment can give you a better return in a much safer way
The performance of mutual funds depends mainly on the fund manager who manages the fund on your behalf. Making the decision based on knowledge, picking a well-performing fund manager is utterly important to your success. For all of that, you should need some basic information on mutual fund investment.
OK, you own the mutual funds comprising a collection of stocks and bonds. That is your upper hand.
Why? First of all, it allows you to buy in with notably less money than it would take to purchase the same portfolio of stocks/bonds on your own. Second, you spread the risks out there among a group of investors if something goes wrong.
How the mutual fund portfolio is structured
It isn’t one single stock or bond of one sector alone. Therefore you can reduce your risks of losing your money to a greater extent. Always keep in mind that you may be the worst loser in the stock market due to a periodical deep cut in share prices. True is, there is no full-proof method or strategy that is completely safe and without risks. That’s the fact. But, mutual funds have lower risks than many other investment options. This makes them suitable for novices, traders who lack proper knowledge and skills in the investment market.
Mutual funds often have much better rates of return than the average savings account at the local bank.
Besides that, you may have minimum risks in this type of investment compared to other more risky ventures.
Even more, if you have some idea of which sectors are performing well, you are at an advantageous position of choosing a good sectoral fund. But be cautious, you should select a well-rated company. Diversification is the key to a healthy portfolio and mutual funds will help you get a diversified portfolio.
This is one of the safest ways to invest your money in the long term if you are young enough and in no hurry for retirement because the most mutual funds do not have the high payoffs that many investors seek to include for their retirement planning.
What are the main types of mutual funds?
Essentially, there are three types of mutual funds with some variations on each:
Money market mutual funds are an open-ended mutual fund. These types of funds invest in short-term debt securities. This is regarded as safe as bank deposits yet providing a higher yield. These funds are great for long-term investors. This slow and stable access to investing is better than leaving your money in an interest-paying savings account.
Equity funds that may provide slow growth over time with some income along the way.
Fixed income funds are created to provide a current income. This is great for those who have retired or for investors who are extremely conservative.
Besides this, you need to have certain basic knowledge about diversifying your portfolio of rated mutual funds. That can give you an attractive return with the highest safety. In a roar bull market, investing in Diversified Equity Fund is the best option (60% of the total fund), then comes Balanced Fund (20%), followed by Midcap Fund (10%), Small-cap Fund (5%) and Liquid Fund (5%). If you’re a conservative trader, you may opt-in Debt Fund. But if you’re optimistic, you can go for index funds as a systematic investment plan. Index Fund can deliver you a very profitable return in a bull market. Why? Because index fund includes highly rated performing stocks with diversified sectors and reliable.
One of the benefits of investing in a mutual fund is that offers professional investment management and potential diversification
Ways to earn money by investing in a mutual fund:
Dividend Payments. A fund earns income from dividends on stock or interest on bonds. The fund pays the shareholders almost all the income, lower for expenses.
Capital Gains Distributions. The price of the securities in a fund may grow. By selling a security that has increased in price, the fund has a capital gain. At the end of the year, the fund shares the capital gains, lessen by any capital losses, to investors.
Increased NAV. When the market value of a fund’s portfolio rises, the value of the fund and its shares increases also. If the NAV is higher the value of shareholders’ investments will be higher too. NAV is calculated by adding up the current value of all the stocks, bonds, and other securities, including cash, in its portfolio. Then, subtract the manager’s salary and other expenses, and then divide that result by the fund’s total number of shares.
All funds carry some level of risk. It is possible to lose some or all of the money you invest. The reason is obvious, the mutual fund holds securities that can decrease in value. Dividends or interest payments are also changing along with changes in market conditions.
A fund’s past performance is not important because past performance does not predict future returns. But past performance will never tell anything about the future performances but can tell you how volatile or stable a fund has been in the past. If you find a fund had more volatility, that is a sign that there are higher investment risks.
Every mutual fund must file a prospectus and regular shareholder reports, that’s by the law. Read the prospectus and the shareholder reports before you invest. Also, the investment portfolios of mutual funds are managed by investment advisers. You should always check that the investment adviser is registered before investing.