Mutual Funds 101: Mutual funds meaning, types, advantages, and more!
What are Mutual Funds? Are you still not sure? That is alright; we have all been there at some point, however, with an elucidative guide here let’s get you covered. With the help of the right investment guide, mutual funds are an excellent way to invest and plan for your retirement. However, do remember that you should never invest in something about which you don’t have enough clarity. So, here is a closer and more detailed peek into mutual funds meaning, different types of mutual funds, and how they can become the most invaluable tool in your investing needs and requirements. On a side note, you can also check online to know more about mutual funds meaning, types, and much more.
What is a Mutual Fund?
The meaning of mutual funds is that they are financial instruments having a pool of money that is amassed from different investors to invest in securities such as bonds, stocks, money market instruments, and other assets. A team of professional money managers operate mutual funds and also allocate the fund’s assets and aim to produce capital gains or income for the mutual fund’s investors. The meaning of mutual funds involves a structured portfolio that is managed to equal the investment goals and aspirations, as stated in their prospectus.
Instead of demanding investors to perform the Herculean task of selecting individual stocks themselves, mutual funds provide average as well as individual investors with the option to choose the type of mutual funds that would suit their needs and requirements. The meaning of mutual funds is to give small investors access to portfolios of bonds, equities, and other assets that are managed by professionals. Mutual funds meaning is that they invest in a vast number of securities. Also, their performance is customarily tracked as the variation in the total market cap of the fund, derived by the aggregating performance of the underlying investments.
What are the Different Types of Mutual Funds?
Mutual funds can be classified into different kinds of categories, representing the types of securities targeting for the portfolios along with the kind of returns sought. There is a mutual fund for almost every type of investor and investment approach. Given below are the seven common types of mutual funds.
- Fixed income funds: These kinds of mutual funds buy investments that pay a fixed rate of return such as government bonds, high-yield corporate bonds, and so on. They ensure that the money comes into the fund on regularly, primarily through the interest that the fund earns
- Index funds: These funds intend to track the performance of a particular index such as the S&P/TSX Composite Index. The rate of the mutual fund will increase or decrease as the index goes up or down
- International Funds: An international fund is a type of mutual fund meaningly investing in assets located outside your residential country. It is difficult to distinguish these funds as either riskier or safer than domestic investments; however, they are considered to be more volatile
- Money Market Funds: These mutual funds invest in liquid instruments. They are considered to be safe investments for those seeming to park surplus funds for quick but steady returns. They are usually a more reliable investment option with a lower potential return over other types of mutual funds
- Debt Funds: This type of mutual fund invests in debt tools like company debentures, government bonds, and other fixed-income assets. They are supposed to be a safe investment option and provide fixed returns. These funds do not subtract tax at the source; hence if the earning from the investment is over INR 10,000 then the investor is likely to pay the tax on it
- Hybrid or Balanced Funds: This kind of mutual fund invests in an assortment of asset classes. In some instances, the proportion of equity is higher than debt, whereas in others it is the opposite. Henceforth, the risk and returns are balanced out this way
- Equity Funds: Also known as stock funds, this mutual fund invests in equity stocks & shares of different companies. Though it is considered as a high-risk fund, they usually provide high returns. Equity funds can include specialty funds such as infrastructure, fast-moving consumer goods, banking, and more. They are of three different types- large-cap (big blue-chip companies like Google), mid-cap (firms that may not be behemoths but are not startups either), and small-cap (relatively diminutive companies)
What are the Advantages of Investing in Mutual Funds?
Advanced investor or not, here is a reminder/ heads-up as to why mutual funds meaningfully are suitable for your financial goals and lifestyle. Given below are the few advantages of mutual funds.
- Mutual Funds are easy and straightforward to understand
- Mutual funds have extensive market exposure, thus making it possible to achieve diversification
- They are easy to buy, making them accessible
- Mutual funds have relatively low minimums, thus are consequently affordable
- They come in a wide variety of categories and types, further making them a convenient option
- They are usually more economical than the typical portfolio of stocks
- They have a professional team for researching and analyzing the investments so that you have to
- Mutual funds have a manifold of applications that overlap into simplicity and flexibility
What are the Key Takeaways?
- Mutual funds’ purpose is to provide small or individual investors access to diversified and professionally managed portfolios but at a low price.
- Mutual funds meaning is that it is a kind of investment tool comprising of a portfolio of stocks, bonds, or other securities
- Mutual funds are classified into different types of categories which represent the kinds of securities that they invest in, their investment objectives, and also the kind of returns they seek
- The preponderance of money in employer-sponsored retirement plans gets invested into mutual funds
- Mutual funds charge annual fees know as expense ratios, and, in certain cases even commissions, that can influence their overall returns
- Monthly contributions help to ensure that the investors’ assets grow
- Mutual funds are more liquid because they tend to be less volatile