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