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Investing or Buying shares in mutual funds can be intimidating for beginning investors. There is a huge amount of funds available, all with different investment strategies and asset groups. Investing in mutual funds is different from trading shares in stocks or exchange-traded funds. Understanding the performance of investments in a fund is very important and as such, we at ANC STOCK INVESTMENT LTD deem it necessary to educate our investors on Mutual funds. The following is a guide to help our investors speed up their level of understanding when it comes to investments in mutual funds.
A mutual fund is an investment company that takes money from many investors and pools it together in one large pot. The professional manager for the fund invests the money in different types of assets including stocks, bonds, commodities and even real estate. An investor buys shares in the mutual fund. These shares represent an ownership interest in a portion of the assets owned by the fund. Mutual funds are designed for longer-term investors and are not meant to be traded frequently due to their fee structures.
Mutual funds are often attractive to investors because they are widely diversified. Diversification helps to minimize risk to an investment. Rather than having to research and make an individual decision as to each type of asset to include in a portfolio, mutual funds offer a single comprehensive investment vehicle. Some mutual funds can have thousands of different holdings. Mutual funds are also very liquid. It is easy to buy and redeem shares in mutual funds.
There is a wide variety of mutual funds to consider. A few of the major fund types are bond funds, stock funds, balanced funds and index funds. Bond funds hold fixed-income securities as assets. These bonds pay regular interest to their holders. The mutual fund makes distributions to mutual fund holders of this interest.
Stock funds make investments in the shares of different companies. Stock funds seek to profit mainly by the appreciation of the shares over time, as well as dividend payments. Stock funds often have a strategy of investing in companies based on their market capitalization, the total dollar value of a company’s outstanding shares. For example, large-cap stocks are defined as those with market capitalizations over 10 billion. Stock funds may specialize in large-, mid-or small-cap stocks. Small-cap funds tend to have higher volatility than large-cap funds.
Balanced funds hold a mix of bonds and stocks. The
distribution among stocks and bonds in these funds varies depending on the fund’s strategy. Index
funds track the performance of an index such as the S&P 500. These funds are passively managed.
They hold similar assets to the index being tracked. Fees for these types of funds are lower due to
infrequent turnover in assets and passive management. Risk Tolerance and Investment Goals
The first step in determining the suitability of any investment product is to assess risk tolerance. This is the ability and desire to take on risk in return for the possibility of higher returns. Though mutual funds are often considered one of the safer investments on the market, certain types of mutual funds are not suitable for those whose main goal is to avoid losses at all costs. Aggressive stock funds, for example, are not suitable for investors with very low-risk tolerances. Similarly, some high-yield bond funds may also be too risky if they invest in low-rated or junk bonds to generate higher returns.
Your specific investment goals are the next most important consideration when assessing the suitability of mutual funds, making some mutual funds more appropriate than others. For an investor whose main goal is to preserve capital, meaning she is willing to accept lower gains in return for the security of knowing her initial investment is safe, high-risk funds are not a good fit. This type of investor has a very low-risk tolerance and should avoid most stock funds and many more aggressive bond funds. Instead, look to bond funds that invest in only highly rated government or corporate bonds or money market funds.
If an investor's chief aim is to generate big returns, she is likely willing to take on more risk.
In this case, high-yield stock and bond funds can be excellent choices. Though the potential for
loss is greater, these funds have professional managers who are more likely than the average retail
investor to generate substantial profits by buying and selling cutting-edge stocks and risky debt
securities. Investors looking to aggressively grow their wealth are not well suited to money market
funds and other highly stable products because the rate of return is often not much greater than
Income or Growth?
Mutual funds generate two kinds of income: capital gains and dividends. Though any net profits generated by a fund must be passed on to shareholders at least once a year, the frequency with which different funds make distributions varies widely.