A mutual fund refers to a form of investment that comprises of a pool of funds that are usually collected from different investors in a bid to invest in various income generating activities such as stocks, money market or bonds. They are usually controlled by skilled finance managers who manage it in order to ensure that they deliver some capital gains after some time. One of the major benefits of mutual fund is that it gives medium and small investors a chance to access equities, bonds, securities and other professionally managed capital investments.
There are different types of mutual funds and each of them varies in terms of their design and structure. Let us look at some of the mutual funds in the US.
Equity Income Funds – The main objective of this fund is to invest in various stocks and bonds. The gains from this investment are paid in form of dividends. In most cases their returns are less as compared to other mutual funds such as the growth funds since they are more interested on growth than returns. In fact they can have an impact on the stock market downturn due to their relatively soft emphasis on income.
Bonds – This involves investing funds on various bonds that are structured to deliver a regular amount of income from the interest gained. They are very effective in helping investor crawl out of stock market shortfalls. It is also important to note that they tend to offer low returns than growth funds especially during market upswings. Some of the risks that this mutual fund is subject to include fluctuations in prices due to interest changes as well as losses in case a bond issuer defaults the terms and conditions.
Growth Funds – The main investment objective of this mutual fund is to invest in stocks of the best companies or businesses that have a potential of producing high returns at the end of the financial year. They are mostly recommended to investors that exhibit a high tolerance and resilience to various risks that can affect its returns such as market forces. They tend to grow very fast in rising markets but they usually drop sharply in falling markets.
Balanced Funds – They usually invest in stocks, bonds and cash equivalents. Mostly, they achieve growth from both income and capital in the long run. In most cases, they are able to deliver more profit gains as compared to growth funds due to their unique mix of investments. However in some scenarios, they produce lower returns when compared to growth returns especially during a market upswing.
Cash Equivalent Funds – This fund is usually invested in short term securities such as Treasury bills. Their core objective is to preserve the initial investment even though they are not guaranteed. They also tend to deliver lower returns as compared to other mutual funds but they are better since they expose investors to lesser risks.
Growth and Income Funds – This are very similar to growth funds, the only difference is that they are susceptible to fewer risks since the income generated from the bonds and dividends can be used to cushion an investor from the uprising and downfall of the market due to forces such as price fluctuations. Just like growth funds, they aim at investing in stocks offered by companies that are more promising and capable of providing higher returns.
Target Date Funds – This is a unique form of mutual fund that aims at balancing the investors’ needs by making the necessary adjustments of their fund holdings as their retirement dates draws closer. The holdings in this form of fund are automatically adjusted upward from a particular high percentage growth to a higher income funds as the retirement period approaches. Unlike other types of mutual funds such as balance funds that invests in different investments, this one is specifically structured for only one investment.
Value Mutual Fund – This refers to funds that are usually invested in companies that are considered to have relatively low P/E ratios. In most cases, these companies are not listed in the mainstream by investors due to various reasons such as changes in investors’ preferences or inadequate quarterly earnings. Since most of these companies are usually static, they use their earnings to pay the dividends. One of the major advantages of this option is that they offer less volatile returns and are more conservative.
Be sure to consider your personal financial preferences and goals when selecting a mutual fund. A professional financial analyst can furnish you with additional information that will guide you in making an informed decision.