Learn the meaning of mutual funds and the functions and objectives of this popular financial instrument that many invest in.
Initially, it was invented as just another financial instrument for investment. However, over time it has gained a lot of popularity. Millions of people are investing in mutual funds today. In the US alone, people invest trillions of dollars 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:
The Definition of Mutual Fund
A mutual fund can be described as a pool of money that is collected from several investors and invested in different instruments. These include bonds, stocks, real estate, 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. They prefer to use this fund instead of a savings account. There are many people who individually invest in stocks bonds but they do it with mutual funds. The mutual fund unit is responsible for this work. 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. They also share the expenses, gains and losses of the purchased unit. A team of qualified professionals actively manage the funds of the investors. They create an investment portfolio for this. The professional management team has the responsibility to choose where to invest the money of the mutual fund unit holders and they monitor them. They receive payment for their service. They also collect a sales charge when they sell funds. The investor in a mutual fund is the owner of the purchased unit only and has no rights on individual securities such as bond funds. The risk factor is low in a mutual fund as the investments are diversified by creating a portfolio of investments in a large number of securities.
If the objective of the types of mutual funds is equity or growth then you will understand that the company will invest in stocks only. If the objective however is debt or income then they invest only in fixed income securities. The company will invest in short term 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. This will maintain a balance between risk and returns.