What Is a Mutual Fund?

fortpitt in Investments 24 May, 2021

Mutual funds are essentially a collection of money compiled from multiple investors. The money is pooled together and professionally managed and invested in things like stocks and bonds according to the investment objectives of the fund itself. Each fund has its own investment objectives and risks as outlined in the prospectus. You can choose the mutual fund that fits with your own personal investment objectives and risk tolerance.

For example, if you want to invest in bonds, you can choose a bond mutual fund. If you want to invest in stocks, you can choose a mutual fund the primarily holds stocks. Each one has its own risks and rewards, strategies and costs. The basics of buying a mutual fund are a great place to start for more information.

How Do You Buy a Mutual Fund?

You have several options when making a mutual fund investment. Most people get acquainted with the concept of mutual fund investing through their employer’s 401(k). You can enjoy automatic contributions from your paycheck, tax-deferred growth on investments and employer matching, though it’s advisable to read up on your retirement plan investment options. Consult a financial advisor to choose the best mutual fund options for your specific set of circumstances.

Another way to invest outside your company’s retirement plan is to invest in mutual funds through an individual retirement account (IRA). With this method, your investment growth is tax-free. You can also buy and sell mutual fund shares through individual brokerage accounts.

12 Types of Mutual Funds

Mutual funds are appealing for their variety, offering a broad spectrum of options for nearly every type of investor. Here are some examples:

  • Equity funds: The largest category of mutual funds covers equity or stock funds, where you’ll invest primarily in stocks.
  • Fixed-income funds: These funds focus on investments with a set return rate, such as corporate or government bonds.
  • Index funds: Predicated on the belief that it’s difficult to beat the market consistently, these funds include stocks corresponding with a major market index.
  • Balanced funds: This type involves investing in various asset classes like stocks, bonds and money market instruments to reduce the risk of exposure.
  • Money market funds: Money market funds consist of short-term debt instruments like government Treasury bills, focused on preserving your principal.
  • Income funds: With this type, you’ll mostly invest in government and corporate debt, holding bonds until maturity for interest streams.
  • International/global funds: International funds invest in assets outside of the United States.
  • Specialty funds: These consist of popular funds that don’t necessarily belong to any of the more rigid categories.
  • Exchange-traded funds (ETFs): These are structured as investment trusts and traded on stock exchanges.
  • Growth and income funds: Growth and income funds are largely comprised of stocks from big companies, which are typically more predictable with moderate returns.
  • Growth funds: These are stocks from medium-to-large companies with room to grow, often yielding higher returns.
  • Aggressive growth funds: This category includes more volatile funds that experience significant highs and lows.

What Costs Come With a Mutual Fund?

Mutual funds are far from free. Before you invest, review the various fees you’ll incur such as:

  • Operating expenses
  • Shareholder fees
  • Purchase fees
  • Redemption fees
  • Exchange fees
  • Account fees
  • Front-end load fees
  • Back-end load fees

These costs can cut into your return rates, so it’s critical to find a mutual fund that performs well and won’t charge you a lot for your investment.

How Much Risk Is Involved With Investing in Mutual Funds?

Your approach to mutual fund investing will ultimately determine the risk. Certain types of mutual funds will place you at greater risk, like aggressive growth funds, while an income fund is more stable. Beyond the type you choose, you’ll also need to account for fees.

Mutual funds are often a wise investment. The strategy that you choose is fundamental to your success or failure, and you should have a strong grasp on your objectives before you move forward.

Make the Most of Your Mutual Fund Investments

We’ve provided a few key pieces of information to inform your decision-making when investing in mutual funds. You might seek additional guidance on how to approach this investment strategy. Fort Pitt Capital Group can help. If you’d like to consult with an advisor, contact us today.

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