Whether you are on a limited investment budget or you are simply a conservative investor, your main interest is investments that are diversified, carry less risk than most other investments and are less expensive. Just like any investment, however, the more you know about mutual funds the better your financial decisions will be.
Mutual funds are a managed group of investments handled by a fund management company. Each fund has a professional manager who makes the day to day decisions about each investment. They also have a prospectus that outlines the general financial goals of the group of investors who own the fund.
What types of mutual funds are there? There are several types and you will need to know the features of each type before you can make a decision of which will be best for you.
The following is a short description of each type.
• The first type of mutual fund is the open ended fund. Actually the SEC uses the name mutual fund to describe open ended funds. With an open ended fund at the end of every day issues new shares to every investor and purchases back shares from anyone leaving the fund. These are called unit investment trusts (UITS). Funds that are not classified as UITs are called closed end funds.
• A new type to come onto the market is an exchange traded fund. These are set up as open ended investment companies and resemble both mutual funds and closed ended. ETFs are traded during the day, just like others, but they keep the prices close to the ETF's net asset value. ETFs are called index funds because they track the stock markets index throughout the day.
• Equity funds are stock investments and are the most common mutual fund, holding more than 50% of all monies invested in mutual's, in the U.S.
• Two distinctions that should be considered. Funds are designated as either growth or value funds. Growth investments only invest in companies that have the capacity for larger capital gains, while value investments look for stocks that are undervalued. Value investments usually have higher returns but this is because they have higher risks. Growth funds do not usually pay regular dividends, and Income funds which are more conservative.
• Bond funds include term funds, municipal bonds, and junk bonds. They have a fixed term, municipal bonds have lower returns but tax advantages and lower risk and junk bonds can have a high yield but much greater risk.
• Money market funds carry the smallest risk factor but have much lower rates of return. They are at 26% of the mutual fund assets in the U.S. Money market shares are also redeemable at any time.
• Hedge funds are combined investment funds with loose SEC regulation. Management fees are generally about 1% or higher and a 20% performance fee.
Mutual funds are a managed group of investments handled by a fund management company. Each fund has a professional manager who makes the day to day decisions about each investment. They also have a prospectus that outlines the general financial goals of the group of investors who own the fund.
What types of mutual funds are there? There are several types and you will need to know the features of each type before you can make a decision of which will be best for you.
The following is a short description of each type.
• The first type of mutual fund is the open ended fund. Actually the SEC uses the name mutual fund to describe open ended funds. With an open ended fund at the end of every day issues new shares to every investor and purchases back shares from anyone leaving the fund. These are called unit investment trusts (UITS). Funds that are not classified as UITs are called closed end funds.
• A new type to come onto the market is an exchange traded fund. These are set up as open ended investment companies and resemble both mutual funds and closed ended. ETFs are traded during the day, just like others, but they keep the prices close to the ETF's net asset value. ETFs are called index funds because they track the stock markets index throughout the day.
• Equity funds are stock investments and are the most common mutual fund, holding more than 50% of all monies invested in mutual's, in the U.S.
• Two distinctions that should be considered. Funds are designated as either growth or value funds. Growth investments only invest in companies that have the capacity for larger capital gains, while value investments look for stocks that are undervalued. Value investments usually have higher returns but this is because they have higher risks. Growth funds do not usually pay regular dividends, and Income funds which are more conservative.
• Bond funds include term funds, municipal bonds, and junk bonds. They have a fixed term, municipal bonds have lower returns but tax advantages and lower risk and junk bonds can have a high yield but much greater risk.
• Money market funds carry the smallest risk factor but have much lower rates of return. They are at 26% of the mutual fund assets in the U.S. Money market shares are also redeemable at any time.
• Hedge funds are combined investment funds with loose SEC regulation. Management fees are generally about 1% or higher and a 20% performance fee.
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