Mutual funds are defined as a professionally managed form of “collective investment scheme” which pools in money from a group of investors to buy bonds, stocks, short term money instruments etc.
There are different types of mutual funds; these include:
- Money Market Funds – It is an open ended mutual fund which invests in short term debt securities. The main feature of this fund is that at the end of the tenure, one will earn double the amount of one’s total savings and a little less of the certificate of deposit (CD).
- Balanced Funds – It is a combination of mutual funds that buy a mixture of common stocks, bonds, preferred stocks, and short term bonds. The sole objective to this fund is to provide investors with a mutual fund which involves both financial and growth objectives. As a result, these funds are able manage any downturns in the market and without making much loss, carve out its way into profit.
- Bond Funds – It is a collective investment scheme which involves both bonds and various debt securities. It pays periodic dividends and its primary assets include mortgage, government treasury etc.
- Equity Funds – Also called the stock funds; it invests in equities also called stocks. It is a complete contrast to bond funds and money funds. The main purpose of equity fund is “long term growth for capital gains”. It has a specific style, like its value or growth.
The advantages of mutual funds are:
- Diversification – It is interesting to note that individual investments react differently in different situations. There is the rise, and fall in interest rates depending upon the economic conditions. So a proper balance between both will make one benefit over time.
- Liquidity – One can draw out money invested from the mutual fund any time they want to. It is just a call away.
- Low Cost – It is less expensive in comparison to direct investment in the capital markets.
- Potentiality of Higher Return – The mutual funds have the potentiality of higher return in the long term.
- Transparency – One gets regular updates and information of the specific investments undertaken by one’s scheme.
- Choice of Schemes – Mutual funds offer a variety of schemes which are easy to understand.
Thus, before investing in mutual funds, one must know the Net Asset value that is, the assets of the fund minus the liabilities is the value of the fund. So Net Asset value per share is the cost of the mutual fund.