Mutual Funds

Once a relatively obscure financial instrument, mutual funds have become extremely popular over the past decade or so, as more and more investors turning towards them to save for retirement and other financial goals. For a great number of people, they are the first step towards investing their cash which might otherwise be left to waste away in a savings account.

A mutual fund is essentially a company that uses the money from its investors to create a portfolio. The portfolio is the combined holdings owned by the company and encompasses its investments in areas such as stocks, bonds, securities, short-term money making instruments and other assets. A share, therefore, is representative of the investor’s proportionate ownership of the fund’s holding and the income generated from the holding.

While mutual funds offer the advantages of diversification and professional management, investing in them does come with certain risks. These funds are not guaranteed by any government agency and it is possible to lose money investing in them.

Before you invest in mutual funds, it should be important to note that not all mutual funds are created equal. Which products you choose should depend upon your personal financial goals and tolerance for risk.

Generally speaking, as the potential for returns from the fund increases, so does the associated risk of loss. Past performance should not be taken to be an indicator of future performance, since it is only useful in assessing the fund’s volatility over time.

There are thousands of options when it comes to deciding upon mutual funds to invest in. The three general categories are money market funds, bond funds and stock funds. It might be useful to consult a financial professional to figure out your financial goals and risk tolerance to narrow down your options and invest in funds whose investment strategy is in congruence with your personal financial aims.

The advantages of investing in mutual funds include the professional management of your money, through which a diversified investment portfolio – which stretches across a wide range of companies and industry sectors – is created.

Certain mutual funds are also relatively affordable since they offer low prices for initial purchases, which are followed up by monthly purchases. They have good liquidity and it is possible for an investor to redeem shares at any time.

On the other hand, there is the problem of lack of control as the investor cannot directly influence the decisions taken with regards to investments. Further, an investor is liable to a range of charges including sales charges, annual fees and taxes even if the fund itself goes on to perform poorly.