A mutual fund is a type of investment that allows a group of investors to collectively hold a diversified portfolio invested in many financial securities such as stocks, bonds, etc. In the U.S., the Securities and Exchange Commission (SEC) oversees mutual funds to enforce federal securities laws and ensure that the fund is managed in the best interest of its investors.
The advantages of investing in mutual funds, as compared to investing in individual assets, include: higher diversification, professional management, daily liquidity, and participation in investments usually offered to high net worth investors only. The disadvantages on the other hand include: additional fees and no opportunity to make modifications in the structure of the mutual fund portfolio.
Mutual funds are divided into 3 main types: open-end funds, closed-end funds and unit investment trusts. Open-end mutual funds issue and buy back their shares at any time, at their Net Asset Value (NAV). Share transactions by the investors are usually done directly with the fund. Closed-end mutual funds on the other hand, issue shares only at the fund’s outset, through an Initial Public Offering (IPO) . Investors who wish to sell their shares have to sell them to other investors, at prices determined by the market which are usually different from the NAV. Unit investment trusts offer a fixed portfolio, whose securities cannot be sold or bought before the portfolio’s “maturity”. Finally, we also have the ETFs (Exchange Traded funds), which don’t constitute a distinct type, but their increasing popularity forces us to say some things about them. ETFs are traded throughout a day on stock exchanges (as common stocks are), at market determined prices, which are close to the NAV.
The management style of mutual funds can be either passive or active. Passively managed (or index) funds usually try to mirror the performance of a particular market index. Actively managed funds, on the other hand, usually try to outperform some target index, the benchmark.
Mutual funds are also classified by the type of financial securities they invest in. There are four main categories: money market, bond, stock and hybrid funds. Money market mutual funds invest in fixed-income securities, with short maturity and high credit quality. These characteristics make money market funds a substitute for bank saving accounts. Bond funds, as their name suggests, invest in bonds, such as government bonds, corporate bonds, etc. Stock funds invest in stocks and they make up almost 50% of the mutual funds in the U.S. Finally, hybrid funds invest in bonds, stocks, as well as other securities such as derivatives and other mutual funds.
Why should a stock trader or investor invest his money in mutual funds? First and foremost mutual funds are managed by highly trained and qualified investors, who supposedly have superior investment skills and information. Secondly, mutual funds exploit the most important benefit of asset allocation: diversification. Mutual funds invest in hundreds of securities globally a fact that retail investors cannot realize on their own. Thirdly, the numerous types and management styles of mutual funds, assure that each investor will find a fund that fits his investment goals. However, there are some points that need caution by investors. For example, it is important to know your risk tolerance and the risk that the mutual fund assumes. Furthermore, there are some expenses that investors should have in mind and which change among mutual funds: fees when you buy and sell a mutual fund, general expenses, fees on the gains, etc. Last but not least, be sure to understand that past performance doesn’t guarantee future gains. Although past performance is the guide for making forecasts and predictions, blindly looking at past returns could be dangerous.
At the end of the day it’s up to the stock trader to evaluate his options and make the best decisions. Investing in a mutual fund or making individual investments is up to you to decide.
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The advantages of investing in mutual funds, as compared to investing in individual assets, include: higher diversification, professional management, daily liquidity, and participation in investments usually offered to high net worth investors only. The disadvantages on the other hand include: additional fees and no opportunity to make modifications in the structure of the mutual fund portfolio.
Mutual funds are divided into 3 main types: open-end funds, closed-end funds and unit investment trusts. Open-end mutual funds issue and buy back their shares at any time, at their Net Asset Value (NAV). Share transactions by the investors are usually done directly with the fund. Closed-end mutual funds on the other hand, issue shares only at the fund’s outset, through an Initial Public Offering (IPO) . Investors who wish to sell their shares have to sell them to other investors, at prices determined by the market which are usually different from the NAV. Unit investment trusts offer a fixed portfolio, whose securities cannot be sold or bought before the portfolio’s “maturity”. Finally, we also have the ETFs (Exchange Traded funds), which don’t constitute a distinct type, but their increasing popularity forces us to say some things about them. ETFs are traded throughout a day on stock exchanges (as common stocks are), at market determined prices, which are close to the NAV.
The management style of mutual funds can be either passive or active. Passively managed (or index) funds usually try to mirror the performance of a particular market index. Actively managed funds, on the other hand, usually try to outperform some target index, the benchmark.
Mutual funds are also classified by the type of financial securities they invest in. There are four main categories: money market, bond, stock and hybrid funds. Money market mutual funds invest in fixed-income securities, with short maturity and high credit quality. These characteristics make money market funds a substitute for bank saving accounts. Bond funds, as their name suggests, invest in bonds, such as government bonds, corporate bonds, etc. Stock funds invest in stocks and they make up almost 50% of the mutual funds in the U.S. Finally, hybrid funds invest in bonds, stocks, as well as other securities such as derivatives and other mutual funds.
Why should a stock trader or investor invest his money in mutual funds? First and foremost mutual funds are managed by highly trained and qualified investors, who supposedly have superior investment skills and information. Secondly, mutual funds exploit the most important benefit of asset allocation: diversification. Mutual funds invest in hundreds of securities globally a fact that retail investors cannot realize on their own. Thirdly, the numerous types and management styles of mutual funds, assure that each investor will find a fund that fits his investment goals. However, there are some points that need caution by investors. For example, it is important to know your risk tolerance and the risk that the mutual fund assumes. Furthermore, there are some expenses that investors should have in mind and which change among mutual funds: fees when you buy and sell a mutual fund, general expenses, fees on the gains, etc. Last but not least, be sure to understand that past performance doesn’t guarantee future gains. Although past performance is the guide for making forecasts and predictions, blindly looking at past returns could be dangerous.
At the end of the day it’s up to the stock trader to evaluate his options and make the best decisions. Investing in a mutual fund or making individual investments is up to you to decide.
StockTradingCollege.com, Stock Trading and Investing for Beginners