The lower the rates on bank deposits fall, the more people rush to the stock market. Investments in mutual funds are considered to be the optimal tool suitable for your first acquaintance with investments. They are especially popular among both beginners and experienced users due to their security, although everything depends on the investment term.
Those who have invested money in mutual funds are insured against the loss of the bulk of deposits, but, on the other hand, the incomes of depositors are so insignificant that over time they are eaten up by inflation. This means that they’ll be useful to those who want to contribute cash to short-term programs. That’s what we’re going to discuss today!
The most popular investment tool in the history of mankind is gold. This is the only asset that has been steadily growing in price throughout the time.
What is mutual fund in simple words?
The concept of mutual fund is extremely simple — it’s an asset portfolio formed by pooling of funds of a large number of depositors. Initial contributions in some of them range from $300-500, and after an account is opened, subsequent investments can be added in any amount.
Regardless of the investment strategy and goals, brokerage houses and investment companies act as founders of a fund or a group of funds. For the convenience of the founders, their funds are easily transferred from the securities of one company to the securities of another without any commissions.
How do mutual funds work?
The principle of mutual funds’ operation is based on mutually beneficial cooperation between the investor and the fund management. Depositors voluntarily contribute money to receive income or preserve their available funds and traders use them to buy securities, shares of various companies, and government bonds, thus forming an investment portfolio. The investor is issued a document confirming their right to participate in the amount of the contribution made.
What are the objectives of mutual funds?
All mutual funds operate on almost the same principle and pursue the same goals. They are formed by an investment company that sells its shares to depositors, after which it invests the funds received in securities portfolios (often in mutual fund portfolio). By combining depositors’ funds into a portfolio, the head of the company can diversify investments by purchasing bonds and shares in the fund.
What types of mutual funds are the most popular today?
The best way to invest in mutual funds is to find out which option suits your goals. Experts currently identify the following types of funds:
- Funds created to increase capital. Such institutions specialize in the purchase of securities whose price are expected to grow rapidly. Companies that issue such shares invest all the funds they receive in their development, not paying dividends to their shareholders. Investing in such stocks is a serious, but potentially justified risk. If the company develops and becomes successful, capital may increase several-fold.
- Funds whose purpose is to increase income. They are engaged in buying shares of companies that pay out the largest dividends or a percentage of profits. The fluctuations in the price of these securities is of secondary importance.
- Funds created for capital and income growth. They have a strategy according to which their traders seek out stocks of companies that will pay dividends to investors, but at the same time will increase in value.
- A balanced fund. It’s an organization with a flexible trading strategy. It sells and buys shares of companies on the stock exchange, depending on the current market situation. In a financial crisis, the management of an institution may decide to transfer some securities to others, for example, stocks to bonds.
The classification of mutual funds assumes that depositors invest in different instruments — bonds, stocks, hybrid, commodity investment companies, and money market funds.
Functions of mutual funds and their main features
Let’s highlight the following important points:
- mutual fund shares are redeemable;
- investors buy the fund’s shares in the organization itself (or through the fund’s broker), and it’s impossible to buy them from investors in the secondary market;
- the sale of mutual fund shares takes place on an ongoing basis.
It’s difficult to ignore the importance of mutual funds nowadays, since it’s a key tool for those who want to receive additional income. It’s important to remember that the right choice of mutual funds may allow you to secure your savings and receive a stable passive profit, too!