Mutual funds simply let you collect your money together with that of many other investors, then let a professional manager invest that money across enough investments to avoid it being wiped put by any bad move.
The fund basically, is a corporation with the sole business of collecting and investing the money. You buy shares in the fund in order to be included in the pool. In return, your money will be invested by a team of professionals, who look for stocks, bonds or other assets and then invest the money as wisely as can be.
The team normally charges an annual fee of about 0.5% to 2.5% of assets – plus other expenses. That would mean a deduction of your total annual return. This is understandably the amount you pay in exchange of professional direction and instant diversification – this is the driving force of funds to reach 14,000.
Mutual funds can be categorized into two: load funds are those funds that commit a sales charge – cut or withdrawals of any new income attached to the fund; No-load funds are those that do not have sales charges at all.
There are also what you call open-end and close-end funds. Open-end funds typically sell shares to anyone who wants to buy; Basically, they want to invest any new money that the public wishes to put into the fund. The price of the share is determined by the value of the underlying investments and is computed anew each night after the US markets close. Closed-end funds issue a limited number of shares which are being traded on the stock exchange like stocks. The price of close-end fund share can go up or down the actual value of the underlying shares held within the portfolio.
Funds can also be classified according to their investment strategy. Below are brief descriptions of these classifications.
Most of us are familiar with the long-term stock performance reports of the Dow Jones industrial average, the Standard and Poor's 500-stock index, or MSCI World and other broad market indices. Briefly stated, funds based on S & P500 will never outperform the market. However, due to its low priced with $ 2 annual expense for every $ 1,000 investment as compared with $ 14 a year that the average stock charges – mutual funds outdo the greatness of actively managed funds over time.
This type of fund invests in company stocks with the potential for faster and larger capital gains as compared to the overall market, but also drops faster if investors dropped out due to unimpressive predictions.
Fund managers who tend to rely more on value, buy shares of undervalued companies. Sometimes, these are mature companies that pay out dividends to shareholders. Those investments that produce profits are also called equity-income or growth-and-income funds.
When funds are focused on a particular sector – for example, technology or finance, this type is referred to as sector and specialty funds. But, investing in this type of fund is risky since sectors are highly volatile in nature.
Due to the overlapping nature of these fund types, there is a need to branch out in order to diversify. Aggressive growth funds, capital funds, small-cap funds, midcap funds, and emerging growth funds are the type of aggressive funds that provide diversification. But because these types are highly unstable, there are strategies that offer optimum results. One option is to invest it in small companies with modest earnings compared with larger ones but have more potential for gains (and losses). The next option is to invest in high-priced and high-growth stocks. Another is to invest in stocks in "hot" industries – for example health care or technology. Or, you may opt to invest in a number of companies.
There are funds that invest outside the country of residence which come in three different types. International funds, normally buy stocks in huge companies located in stable regions such as Europe and the Pacific Rim. Global funds do similar activities but can also invest within the United States area. Emerging market funds buy stocks in high-risk regions such as Latin America, Eastern Europe and Asia.
Bond funds include term funds, which have either short, medium, or long-term fixed before its maturity. These types tend to separate high-risk bonds known as junk bonds and the safer ones known as Treasury securities; and those taxable bonds against those that are tax-free.
Be reminded of course, that when the market is going down, funds that invest in Treasuries may appreciate and investors herd to the safest investments available. It also holds true when things with the market gaining and during better times, funds invest in riskier bonds such as junk-bonds will also pay off.