The Benefits and Types of Mutual Funds
Last Updated on June 16, 2023
Public curiosity about mutual fund investing has gained steam over the past year. This happens as
For the longest time, saving one’s money in a banking account was thought to be enough. However, with low-interest rates, saving your money in the bank will ultimately decrease your buying power in the years to come. One of the ways to invest with ease is mutual fund investing. It is a pool of money from many investors that makes it possible for fund managers to purchase bonds, securities, bonds, or other financial assets.
Essentially, you own a portion of that investment when you go the mutual fund route. In fact,
Unlike fixed-bank deposits that can only be withdrawn after a certain period, mutual funds can be redeemed at any point in time, giving you access to your money whenever you need it.
Mutual funds do not rely on a single asset class, security, or stock; they consist of many different asset classes and industries. This reduces the risk of complete investment loss for the investors. When one sector experiences a downfall, the fund can rely on other asset classes to make up for lost value. Mutual funds are the epitome of the saying, “don’t put all your eggs in one basket.”
Investing in mutual funds means that you trust your fund managers to manage your mutual fund investment. They will be the ones responsible for researching, selecting, managing, and monitoring the performance. They’re professionals that come with certifications and years of experience; You’ll only need to sit back and relax. But, such services are not free; they often charge between 1.5-2% of the mutual funds’ net asset value.
A mutual fund investor can begin with as little as $100 a month.
Equity funds consist of a collection of stocks of publicly traded companies. It has higher potential growth but has more volatility in value as it relies on the stock market. If the overall market goes up, so does your mutual fund; the reverse also applies here. This type of investment is ideal for younger investors saving for the long-term such as retirement, because they still have a long time horizon, enabling them to weather the short-term volatility.
With this type of fund, investors are paid a fixed amount back on their initial investment. Instead of investing in stocks, bond funds invest in government and corporate debt, less volatile instruments but provide less growth than equity funds (stocks). It is ideal for investors nearing their retirement age who want to protect their funds with higher interest than a bank account.
Ideal for someone looking to invest less than a year, money market funds usually consist of government and corporate bonds, commercial bills, and certificates of deposits with financial institutions. They are considered the safest mutual fund investment.
This type of investment consists of equity (stocks) and fixed-income securities (government bonds) with a fixed-allocation ratio such as 60% in stocks and 40% in bonds, giving you the best of both worlds. Depending on your situation, you can ask your fund manager to tweak your allocation ratio based on your liking. For example, a 40% in stock and 60% in bonds as your retirement approaches since you cannot withstand much stock market volatility.
Mutual funds are ideal for someone who is just starting out in the investing world. As a novice, your MF manager will guide and address your financial needs based on your goals and situation. It is less risky due to its diversification strategy, giving you peace of mind and reaping the optimum profit as a result.
If you’re working with your fund manager to build your investment portfolio,
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