Jan 18 Everything You Need To Know About Mutual Funds
According to a leading financial publication, a mutual fund is “a collection of stocks, bonds, or other securities.” Investing in a mutual fund means that you are buying a share of their collection of investment instruments. In the investment world, the net asset value or NAV refers to the price of each share in a mutual fund. The NAV is calculated by dividing the total value of all the financial securities owned by a specific mutual fund with the number of shares that are issued. Like ordinary stocks, mutual fund shares are traded throughout with price adjustments at the end of each day.
Types Of Mutual Funds
Some mutual funds invest in the shares of publicly traded corporations. These are called stock funds and they are classified according to a company’s size such as small, mid, and large-cap stock funds, or according the type of company, such as growth, value, and blue chip funds. Many stock funds are defined by their geographic scope. We have domestic funds, which only invest at a national level; international funds, which invest in any country in the world; emerging market funds, which buy corporate equity in companies included in the MSCI Emerging Markets Index like Russia and India; and frontier market funds, which focus on smaller countries like Morocco and Chile. Stock funds are better than ordinary stocks because they transfer the investment management burden from the investor to a professional manager, and also because they are easy to diversify and hence are less risky.
Like the name implies, bond funds are types of mutual funds that invest in fixed-income securities. Like ordinary bonds, bond funds invest in a wide variety of bonds including government, municipal, and corporate bonds. Naturally, government and municipal bond funds, which are called money market funds, are the safest. Because of their high security, money market funds, like certificates of deposit and short-term Treasury bills, offer the lowest interest rates; but long-term government and municipal bond funds have higher credit ratings. On the other hand, corporate bond funds offer high returns but they are far much riskier. Bond funds can be classified as short-term, which are the safest with the lowest returns, medium-term, which are moderately safer and profitable, or long-term, which are the most rewarding but very risky.
Actively-Managed vs Exchange-Traded Funds
A mutual fund can either be actively managed or exchange-traded. Actively-managed mutual funds are run by an investment manager who decides which financial securities to invest in. These managers are investment professionals aiming to outperform the financial market by exceeding the index. A mutual fund manager from any accounting firm in Clifton provides expertise and advice with his wealth management services. Exchange-traded mutual funds match the stock index and hence do not involve much trading or the services of expert money managers.
Advantages And Disadvantages Of Investing In Mutual Funds
One of the main advantages of investing in mutual funds is that they are safer than individual stock investments. This is due to the fact that mutual funds offer a diversified investment portfolio. Another benefit of using mutual funds to grow your wealth is that the investor delegates all management activities to a professional wealth manager. The professional mutual fund managers make competent decisions that end up growing your investment in a relatively short period of time.
One of the main disadvantages of investing in mutual funds is that they charge substantial annual management fees. These fees are usually used to pay the mutual fund manager(s), which means that your securities will ultimately cost more than the prevailing market prices. Another con of investing in mutual funds is that their performance is undermined by management changes. The value of your mutual fund investment can fall despite excellent market performance just because the manager is changed.