Mutual Funds 101

Mutual funds are a convenient way for long-term investors to easily own a broad basket of securities.So instead of having to individually buy various stocks or bonds,you can simply buy shares in a mutual fund.Each share of an individual mutual fund represent ownership in literally hundreds of individual stocks and/or bonds.There are several types of mutual funds which are based on the type of securities they own.These fall into two very broad categories-equity funds and bond funds.

Bond investing provides an individual the opportunity to invest in securities that provide a fixed rate of interest.The bonds are issued by various parties such as corporations,federal and state governments,and local municipalities.The ability of government bonds to pay a fixed rate of interest is backed by the taxing authority of the government that issues the bond thus making the bond secure.

Corporate bonds rely on the profitability of the corporation to pay the interest on the bond.A
sub-sector of corporate bonds is the high yield bond market.Corporations which are somewhat less stable and secure are forced to pay higher interest on their bonds in order to attract investors to purchase them.These investors are willing to take on the higher risk in order to gain a higher yield on their investments.

A distinct area of fixed income investing is the money market fund area.It is generally considered to be a safe investment because money markets funds usually invest in only very short-term fixed income securities.These short-term include securities such as 3 or 6 month Treasury bills issued by the US government or 30-day paper issued by US blue chip companies such as General Electric.

Investors basically put their money into corporations in anticipation of receiving a good rate of return on their money.Investors place their money in bonds to earn a higher rate of interest while still maintaining a degree of safety.The next step up the risk ladder for investors would be to invest in stocks.Stocks give the investor the opportunity to participate in the future growth of a company.If a company does well the stock price goes up and if you own the stock the value of it goes up also.

The easiest way for investors to participate in the future growth of companies is to own what is called an equity mutual fund.Equity is simply another word for stock.Most equity mutual funds own a broad base of hundreds of individual stocks.Therefore it is an easy way for investors to participate in the growth of many companies at one time.There are two broad categories of equity funds-growth funds and value funds.Growth funds invest in companies where it is thought that they will have a high rate of growth in the future and therefore a high rate of return of their stocks.These funds do entail a higher degree of risk.Value funds invest in companies who have a slower rate of growth but are thought to have a less risky and steady rate of stock price growth.

One caveat about investing in equity funds.They are intended to be long-term investments and are therefore ideally suited for retirement plans.However some people attempt to trade these funds.They use what is called market-timing.They believe they can find when the best time is to jump into the stock market and buy equity funds and when the best time is to get out of the stock market and sell equity funds.This practice has not proved to be profitable and is strongly discouraged by investment professionals.

Investing for beginners can be overwhelming at times.There is a lot of information for a person to absorb.Probably the best advice is to get your feet wet and start investing with just small amounts.In fact,many mutual funds do offer what is called an Automatic Investing Plan.These plans allow a person to have amounts as low as $50 to be withdrawn from their bank account or paycheck on a monthly or even quarterly basis.It is very easy to establish one of these plans through most mutual fund companies.

Novice investors may have heard the term hedge fund and wondered what they are.A hedge fund has one similarity to mutual funds in that they own a broad basket of securities.But that is where the similarities end.They are very high risk instruments involving high degrees of debt.The rewards may be high,but so is the risk.Only accredited investors usually with assets exceeding $1 million are permitted to invest in these instruments.

There are several interesting types of equity funds which appeal to many investors.The first type is called an emerging market fund.This type of mutual fund invests solely in stocks of companies which are located in the so-called emerging market countries.These countries include the rapidly growing economies of the globe such as Brazil,Russia,India,China,and the Middle East.In recent years,these types of mutual funds have greatly out-performed the funds which invest solely in the US and have become more popular with investors.

The second interesting type of fund which is becoming more popular with investors are gold mutual funds.These funds invest in companies which mine for gold and other precious metals. Investing in gold becomes more popular in difficult economic times.Gold historically has been a store of value and it still seems to today.Recently,the price of gold has climbed dramatically as the value of the US dollar declined.

Mutual funds are a wise choice in helping people achieve their financial goals.