What is a Mutual Fund

If you’re looking for a relatively safe investment that returns more than a savings account or certificate of deposit, you may be interested in a mutual fund. Like other funds, a mutual fund is a collection of securities that are managed by a portfolio manager and sold to investors in shares. They provide a somewhat safer form of investment than stocks, futures and foreign currency, because they’re highly diversified and handled by a professional team of analysts and financial managers.

The Pros and Cons of Managed Funds

Mutual funds don’t return as much as unmanaged investments that aren’t automatically diversified, partly because direct investments in stocks, options, real estate, and other securities don’t include a surcharge for professional management. Another way of looking at it, though, is that mutual funds give investors more time to do other things because the business of managing a stock portfolio is outsourced to a specialist with financial expertise.

It’s possible for an investor to buy stocks through a broker and independently manage and diversify a portfolio, but this investor would need a large starting capital and 40 or more hours a week for market research to match the performance of a mutual fund. For most people, the risk is higher in the stock market, but with a carefully chosen selection of stocks, investors can expect to make about 10 percent per year on average.

Mutual funds tend to perform a little better than most stock indexes, but the surcharge of around 2.5 percent cuts into investor earnings. The fund is made up of investments in stocks and bonds and sometimes real estate and other alternative securities. Shareholders in a mutual fund don’t actually own the securities owned by the fund, and if the value of an investment plummets one day, they can’t sell their shares until the close of the market that evening.

Shares in a mutual fund sometimes go down in value, and when they do, investors still have to pay the fees for managing the fund. This situation causes some annoyance for investors who don’t see why the portfolio manager should be as well-paid for steering the fund in a losing direction. Most of the time, though, they earn money, which is why they’re one of the most popular types of low-risk investment.

You can invest in mutual by two methods, SIP or lump sum. Many people get confused with understanding the difference between SIP and mutual funds, but to clear the doubt, SIP is not an investment product but a way to invest in the mutual funds.

The Purpose of Pooled Investments

Similar managed investments include index funds and whole life insurance policies, which provide living benefits through a lifetime investment in securities, according to Investopedia. Life insurance policies usually invest in mutual funds, index funds or exchange-traded funds, and they pay policyholders a portion of the fund’s earnings when they reach retirement age. The rest of the investment is passed on to the policy’s beneficiaries, and these people, usually the family of the policyholder, can also receive annuities from the fund when the policy expires.

All of these forms of investment are fairly similar, and from an investor’s point of view, there isn’t much real difference. They’re all based on movements in the stock market, and they’re all managed by financial analysts. They’re offered so that regular people don’t need to be financially literate to save money for retirement.

Managed funds offer a relatively safe way to save money with a significantly higher rate of return than a savings account. If you don’t want to deal with the risk of the stock market or foreign exchange market, you may want to look into mutual funds as an alternative.

Scroll to Top