| A mutual fund is a joint stock that is managed for | | | | accuracy about the actual value of the mutual |
| and by the investors who buy into the fund. Such | | | | fund share, as is present in the stock market. |
| mutual funds allow the investors to benefit from | | | | However, the plus points are that mutual funds |
| a diversified investment portfolio, without him/her | | | | could be the best investment plans for the small |
| having to actually invest a large sum of money. | | | | investors, who might not have the capital to |
| A diversified investment portfolio has many | | | | invest in stocks or bonds. Mutual funds provide a |
| advantages. For starters, it protects the investor | | | | buffer effect in case some stocks lose, by |
| against rapid market losses if any one particular | | | | creating a diverse portfolio. But, it is necessary to |
| stock plummets downwards. Consider an investor | | | | point out and understand that mutual funds would |
| who has as many as twenty stocks. In such a | | | | also lose their value over time. Hence it is more |
| case, if one of the stocks loses its value, then the | | | | advisable to go in for a short term investment so |
| loss would be just of one stock among many. | | | | that there is a rate of return. |
| Hence the total value of the loss is felt less. | | | | The three types of mutual funds prevalent in the |
| Though diversification of portfolio is a very good | | | | investment market are the money market funds, |
| investment idea, it is not always possible for small | | | | bond funds and the stock funds. Out of these the |
| investors to put in so much money. This is where | | | | money market funds are the safest as they |
| mutual funds help such investors to get the | | | | contain purely of high quality investments issued |
| benefits of a diverse portfolio with only a small | | | | by the US government itself and by the blue chip |
| investment. | | | | corporations. However, the downside to them is |
| Mutual funds do include stocks, but in addition they | | | | that they pay a low rate of return. |
| can also contain other kinds of holdings such as | | | | Bond funds carry risks associated with companies |
| bonds and market instruments. In the real sense | | | | going bankrupt and falling interest rates. For this |
| of the term, mutual funds are a company and | | | | reason, they also pay better as investments. |
| people who are investing in mutual funds are in a | | | | Stock funds are the riskiest. Short-term investors |
| way buying the shares of that company. Such | | | | could feel the brunt more than long-term |
| shares are directly bought from the fund or by | | | | investors. But the investment is most profitable |
| brokers who are acting for that fund. When the | | | | with stock funds, so much so, that such funds |
| mutual bonds are sold back to the fund, the | | | | have generally outperformed all other kinds of |
| shares are redeemed. | | | | investments over long periods of time. |
| Investment professionals who decide the type of | | | | Growth funds are a type of stock funds. These |
| securities to include in the fund generally manage | | | | can maximize the capital gain and income funds |
| such funds. These funds are rated by an index | | | | that focus only on stocks and perform regularly |
| such as the Dow Jones Industrial Average. The | | | | by paying dividends. |
| mutual bonds simply duplicate the fluctuations on | | | | In short, mutual funds could be wise investments |
| these holdings. | | | | only if people have a fair deal of experience with |
| Mutual funds carry their risks. Investors are | | | | investments. It does not matter if the investment |
| needed to pay some charges irrespective of the | | | | is small, but it is necessary to choose the right |
| manner in which the fund performs. The investor | | | | kind of fund. This enables the investor to calculate |
| would also not have any consensus in what kinds | | | | how much risk he/she is willing to take with the |
| of securities are included in the fund. There is no | | | | investment. |