Learn the definition of mutual funds and of the objectives and functions of this popular financial instrument.
Initially, it was invented as just another financial instrument for investment but over time it has gained a lot of popularity. Millions of people invest in mutual fund today. In the US alone, trillions of dollars are invested in mutual funds. Over the last 20 years, mutual funds have become extremely popular as you will see from the definition, functions and objectives following:
Definition of mutual funds
A mutual fund can be described as a pool of money that is collected from several investors and invested in bonds, stocks, money market instruments and other types of securities. The investors of this fund are regular people who are looking to save money and also earn profits. There are many people who individually invest in bonds and stocks but with mutual funds, the work is done by the mutual fund unit. The investors of this popular financial instrument have full authority to sell off their shares whenever they want.
Think of mutual fund as buying a small slice from a large pizza. Every investor gets a proportionate share of the income, expenses, gains and losses of the purchased unit. The funds of the investors are managed by a team of qualified professionals who create an investment portfolio. The professional management team has the responsibility to choose where to invest the money of the mutual fund unit holders and monitor them. The investor is the owner of the purchased unit only and has no rights on individual securities. The risk factor is low in mutual funds as the investments are diversified by creating a portfolio of investments in a large number of securities.
If the objective of the mutual funds is equity or growth then it is to be understood that the company will invest in stocks only. If the objective is debt or income then they invest only in fixed income securities. The company will invest in short term money market instruments including government securities if its objective is money market. If the objective is balanced then we can say it will invest partly in stocks and partly in fixed income securities to maintain a balance between risk and returns.