- A mutual fund is a financial vehicle.
- It helps in investing in different assets, from bonds, stocks and commodities, to many more.
- It diversifies the investor’s portfolio, which decreases the risk of losses.
A mutual fund is the process of investing in different types of assets with the help of professional investment or money managers who are skilled in trading and research. It is one of the best investment choices because of the feature of portfolio diversification.
What Is A Mutual Fund?
A mutual fund is defined as a financial vehicle that pools assets from shareholders to invest in different securities such as money market instruments, stocks, bonds, and other assets. These are operated by professional money managers. It gives professionally managed portfolios access to small investors of bonds, equities, and other securities. These are mostly part of large investment companies.
The mutual fund’s values depend on the performance of securities. Its shares do not give any voting rights to holders just like stock. The price of a mutual fund share is called the net asset value (NAV) per share. There are three ways of earning a return from a mutual fund:
- It is earned from dividends on stocks and interest on bonds held in the fund’s portfolio.
- The fund realizes a capital gain if the fund sells securities that have increased in price.
- The mutual fund shares can be sold if the fund’s shares increase in price.
There are different types of mutual funds; stock funds, bond funds, index funds, balanced funds, income funds, money market funds, specialty funds, international/global funds, and exchange-traded funds (ETFs). Beginners should always start with index funds.
There are three major categories of mutual funds; large-cap mutual funds, mid-cap mutual funds, and small-cap mutual funds.
Advantages And Disadvantages Of Mutual Funds
The pros of mutual funds are liquidity, diversification, professional management, variety of offerings, and minimal investment requirements.
The cons of mutual funds are their large cash presence in portfolios, difficulty in comparing funds, no FDIC (Federal Deposit Insurance Corporation) coverage, lack of transparency in holdings, high fees, commissions, and other expenses.
There are some major disadvantages of investing in mutual funds; taxes, end-of-day trading, diversification (investment portfolio strategy that implies complexity), high costs, no guarantees, cash drag, etc.
Benefits Of Investing In Mutual Funds
The major benefit of investing in mutual funds is to diversify the portfolio by mixing investments and assets to reduce risk. A diversified portfolio has securities with different capitalizations, bonds and industries. These can be bought and sold with relative ease. It is the most feasible way of investing when it comes to certain types of assets, such as foreign equities or exotic commodities. It provides economies of scale through many commission charges.
A professional investment or money manager uses careful research and skillful trading. There is variety and freedom of choice that helps in the growth of investments in stocks, bonds, commodities, and other assets. It always ensures fairness and accountability for investors.
Conclusion
Mutual funds are very beneficial for investments because of the diversification of the portfolio. The risks of losses are lessened due to the involvement of professional investment managers who are skilled in their field of research and trading. It is very flexible and gives freedom of choice to investors. It provides security to investors. Hence, despite having some disadvantages in terms of cost, guarantee, etc., it can be considered the best investment option.
