A mutual fund is a basket of various investments, such as stocks, bonds, and cash. A mutual fund is pooled money by the investments of individual investors and institutions.
The fund manager applies various analytics and market research to pick up good investment stocks.
Mutual funds are companies that buy pools of stocks and/or bonds as recommended by a fund manager.
Types of the Mutual Funds
Several types of mutual funds are available. Let’s look at the nature of mutual funds.
1. Mutual fund types based on the asset class
(a) Equity Funds(b) Debt Funds
(c) Money Market Funds
(d) Hybrid Funds
2. Mutual fund types based on the structure
(a) Open-Ended Funds(b) Closed-Ended Funds
(c) Interval Funds
3. Mutual fund types based on investment goals
(a) Growth Funds(b) Income Funds
(c) Liquid Funds
(d) Tax-Saving Funds
(e) Aggressive Growth Funds
(f) Capital Protection Funds
(g) Fixed Maturity Funds
(h) Pension Funds
4. Mutual fund types based on risks
(a) Very Low-Risk Funds(b) Low-Risk Funds
(c) Medium-risk Funds
(d) High-risk Funds
5. Specialized mutual fund types
(a) Sector Funds(b) Index Funds
(c) Funds of Funds
(d) Emerging market Funds
(e) International/Foreign Funds
(f) Global Funds
(g) Real Estate Funds
(h) Commodity-focused Stock Funds
(i) Market Neutral Funds
(j) Inverse/Leveraged Funds
(k) Asset Allocation Funds
(l) Gift Funds
(m) Exchange-traded Funds
Advantages of Mutual Funds
Diversification: Portfolio diversified as mixing the assets class and different sectors/companies.
Economies of Scale: Large pool buying by mutual funds of collecting with all individuals and average buying the benefit of economies of scale.
Easy Access: Mutual funds can be bought and sold with relative ease as it is trading on the major stock markets, making them highly liquid investments.
Professional Management: Professional fund managers run the fund, researching securities, investment strategies, or taking investment advisors report. Individual investors will have a low-cost way of specialist advisors (indirectly) and experience of professional money management.
Passive earning for the retail investor: It helps younger, novice, and other individual investors who don’t want to manage their money actively.
Style: Investors have the freedom to research more about the fund manager and fund itself. One can choose different styles of management goals that suit the investor.
Disadvantages of Mutual Funds
Fluctuating Returns: Mutual fund returns based on market movement. Equity mutual funds also experience price fluctuations as stocks of the fund varies along with the market movement.
Cash: Mutual fund has to maintain a cash position as many people enter and many exits. The fund should keep ample cash is great for liquidity, as ideal money is earning returns.
Costs: Mutual fund houses provide investors with professional management services. They charge fees for their service. The management fees magnify the pain, especially when the fund is not doing good.
Lack of Transparency: The investor does not have data and analysis to back up the fund manager decides to buy or sell a stock. It will offer investors the opportunity to examine the P/E ratio, sales growth, earnings per share, etc, unlike share.
