Mutual funds, legally known as open-end companies, are a method of collective investment where a fund manager uses money pooled from many investors to trade in stocks, bonds, and securities, and then collects and passes on any income obtained through dividends or interest. Mutual funds are open-ended, which means that shares are issued to investors and bought back from them at the end of each day.
They can be structured as either corporations or business trusts. Equity funds are the most common type of mutual funds, dealing mainly in stock. Growth funds look for capital gains whilst value funds are aimed at getting a good return on undervalued stock. Growth stocks are riskier and don’t pay dividends regularly but you could make more in the long term. Sector funds concentrate on a specific industry whilst income funds are those that look for regular dividends on stocks.
There are many securities available to invest in with the most common being cash, stock, and bonds. There are many different areas that could be specialized in. You might want to focus on technology industry stock funds, for example. Bond funds can vary according to their risk, the type of entity issuing the bond, or the maturity of the bonds. The fund manager will continually adjust the investment portfolio to achieve the stated aims of the fund.
A balanced fund is one that spreads the risk by using a variety of strategies. Index funds are those using an index like the S&P 500 to determine investments whilst actively managed funds are those using the fund manager to make such decisions. Bond funds can come in high risk, high potential, and low-risk, low potential forms. Money market funds are another low risk, but low return option. A fund of funds is a rather clever idea that involves investing in a variety of mutual funds themselves rather than in one specific one. It should be noted that hedge funds are not mutual funds.