Know About Mutual Funds Before Investing

Know about Mutual Funds before Investing

Mutual funds are those that are made of gathered by number of investors who invest in a huge portfolio of stocks. This collection of money is managed by the personnel called fund managers. There are several types of mutual funds out of which three are basic. Before you can set out to invest in the mutual funds you need to be well versed with the mutual funds basics.

How mutual funds work?

The goal of every mutual fund is to generate maximum income for the investors. The income paid to the share holders are distributed in the form of dividends and capital gains. The mutual funds, like any other kind of investment have the risk too. It is the ROI or the return on investment that determines the performance of a mutual fund. This return is the rate of increase or decrease in the value of the stocks over a specific amount of time. While learning about mutual funds it is important that you learn their pros and cons too.

Classification of mutual funds according to the type of investment

• Stock mutual fund, also referred to as equity fund is those that have the highest amount of return not to forget that they are the ones that involve the highest risks too. Though there is no assertion about these mutual funds performing well, they work best when invested for a longer term.
• Money market funds are the mutual funds that are completely contradictory to the stock mutual funds as they are portrayed by the short term investments. Though having slower rates of growth, the main advantage of money market mutual funds is that there is least risk of running into a loss.
• The mutual fund basics include another type of mutual fund called the bond mutual funds which enable the investor to invest in the corporate and government bonds. Though the amount of returns is very low, there are consistent returns on the investment made in these mutual funds. Risks are inevitable in this type of mutual funds too when the value of the stocks drop and this takes place when the rates of interest drop.

Advantages of investing in mutual funds

• The chief advantage of investing in mutual funds is that there is an option for diversification in mutual funds. This aspect diminishes the amount of risk that is involved.
• Mutual funds are more affordable compared to other kinds of investments as you can also buy more units with small installments.
• Flexibility is another benefit that the mutual funds offer. You can switch between different funds that are managed by the mutual fund companies according to the conditions of the market.

Disadvantages of mutual funds

• There is no insurance against losses that are incurred due to mutual funds. It is the risk that is the biggest disadvantage of mutual funds.
• There are hidden fees collected from the investors by the mutual fund companies and there is no proper execution of trade. The transaction takes place only at the time of closing the market not considering the time you order for the buying or selling of the mutual funds.