Mutual funds are a good way to start investing. They are a collection of stocks, bonds, or other securities. When you purchase a mutual fund, you own a share of that mutual fund. The price of each share in a mutual fund is called its net asset value or NAV. This is the total value of all the securities held divided by the number of shares of the mutual fund. Shares of mutual funds are traded continuously, but their prices are adjusted at the end of each business day.
Equity Funds
Equity funds focus on publicly traded companies. Some mutual funds invest according to company size. These are small, mid, and large-cap funds. Others invest in the type of company. Growth funds focus on innovative companies that are expanding rapidly. Value funds focus on companies that may have been overlooked by others. Similarly, high-tech funds may contain many growing companies. Large-cap funds also contain many value companies. You may want a fund that focuses on companies that pay dividends. Many of these companies are also value or growth companies.
Bond Funds
Bond funds invest in securities that provide fixed returns. They became popular after the financial market crisis in 2008. Investors who suffered losses during the stock market crash in 2008 turned to safety. They were attracted to bonds despite the low interest rates that fell to record lows. The safest funds are money market funds. They purchase certificates of deposit, short-term treasury bonds, and other money market instruments. Because they are very safe, they provide the lowest returns. You can get a slightly higher return with government long-term debt and municipal bonds without additional risk. Higher returns and higher risks occur with corporate bond funds. The riskiest funds hold high-yield bonds. As the Federal Reserve continues to raise interest rates, this can lead to setbacks. Some funds separate short, medium, and long-term bonds. Short-term bonds are safer but have lower returns. Long-term bonds are riskier because you hold them longer. But they offer higher returns.
Active vs. Index Mutual Funds
All mutual funds are either actively managed or passive. Actively managed funds have a manager who decides which security to buy and sell. They have a goal that guides the investment decisions of the manager. The manager seeks to outperform their benchmark by selecting investments chosen by professional money managers. As a result, their fees are higher due to the added costs of paying these managers.
Index funds match an index. Since they do not require a lot of trading, their costs are lower. As a result, these funds have become more popular since the Great Recession.
Pros and Cons
Mutual funds have lower risk than buying individual securities because they are diversified investments. You are not heavily reliant on a single stock or bond and its underlying company. If one company goes bankrupt, you will own more shares to protect your investment.
Actively managed funds provide you with the benefits of professional stock selection and portfolio management. You do not need to research thousands of companies. Managers are experts in every field. It would be almost impossible to become an expert in all the fields you wish to invest in.
But it still takes a lot of time to research mutual funds. To make matters worse, fund managers change. When this happens, it can affect your fund’s performance even if the sector is doing well. This is important because managers constantly change the stocks they hold. Even if you look at the prospectus, it may not reflect the current ownership of the stocks. You do not know exactly what you are buying, so you rely on the manager’s expertise.
Beware of
The prospectus states that past performance is not a guarantee of future returns. But past performance is all you have to rely on. There is a good chance that a fund that outperformed the market in the past will perform less well in the future. This is especially true if the manager changes.
The biggest drawback is that mutual funds charge annual management fees. This ensures that they will cost more than the underlying stocks. These fees are often hidden in several places in the prospectus.
To identify good mutual funds, you need to understand your investment goals. Are you saving for retirement or setting aside some extra cash for a rainy day? Equity funds are best for long-term retirement investing, while a money market fund is best for short-term saving. Work with a certified financial planner. They will help you determine the best asset allocation and investment strategy for you.
Mutual Fund Companies
Mutual funds are managed by hundreds of companies that have hundreds of funds each. Most companies focus on specific strategies to distinguish themselves from others. Here are the top 10 mutual fund companies by size, along with their approach:
- Vanguard: Low management fees
- Fidelity: Full-service financial
- American: Conservative investment strategies with a long-term investment horizon
- Barclays: Targets professional investors, not individuals
- Franklin Templeton: Bonds, emerging markets, and value companies
- PIMCO: Bond funds
- T. Rowe Price: No-fee funds
- State Street: Targets professional investors, not individuals
- Oppenheimer: Actively managed funds
- Dodge & Cox: No-fee funds
How Mutual Funds Impact the Economy
Mutual funds are a critical part of the financial markets in the United States. A good mutual fund reflects how well an industry or sector is performing. The values of mutual funds fluctuate daily. This reflects the asset value in the fund’s portfolio. The economy moves at a much slower pace, so big differences in a mutual fund do not necessarily mean that the sector is fluctuating just as much. However, if a mutual fund’s price drops over time, it indicates that the industry it tracks is also growing more slowly.
For example, a mutual fund that focused on technology stocks was expected to perform well until March 2000, when the tech bubble burst. When investors realized that tech companies were not turning profits, they began selling stocks. As a result, mutual funds declined. With the falling prices of both the fund and stocks, tech companies could not sustain their capitalization. Many went bankrupt. In this way, mutual fund stocks are linked to the U.S. economy.
Source: https://www.thebalancemoney.com/what-are-mutual-funds-3306241
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