Mutual Fund Overview

This article is an overview of Mutual Funds, what they are, what they invest in, types of Mutual Funds and things to look for before investing in Mutual Funds.

What Is a Mutual Fund?

A Mutual Fund provides a way for people with common financial goals to pool their resources together. The money that is brought in is invested by a professional financial manager in a number of different securities. Thus, Mutual Funds are financial intermediaries. They are companies set up to receive your money and then having received it, to make investments with the money. When you buy Mutual Fund shares you are a shareholder – an owner – of that Mutual Fund, with voting rights in proportion to your ownership of the Fund.

What Does a Mutual Fund Invest In?

Mutual Funds typically invest in securities such as stocks, bonds or other specialized types of investments. Stocks represent units of ownership or shares in a company. Also referred to as equities, they are traded in this country in stock markets like the New York Stock Exchange or on similar markets abroad, or they may be traded among traders via the NASDAQ.

Bonds are essentially IOU’s issued by corporations or governments in exchange for a loan of money to them. The promise to pay interest on either a monthly, 6 month basis or annual basis and they promise to repay the principal amount of the bond itself on a specific maturity date, which could be up to 30 years in the future. Like stocks, bonds are traded on exchanges or in markets here and abroad.

Types of Mutual Funds

There are many ways to categorize Mutual Funds. One important way is by objective. Most Mutual Funds pursue either growth of capital, income, or some combination of the two. All Mutual Funds fall within the following categories:

Bond Funds

Bond mutual funds are pooled amounts of money invested in bonds. Usually, the amount of interest paid (the coupon) is fixed at a set percentage of the amount invested, thus, bonds are called "fixed-income" investments.

General Equity (Stock) Funds

Stocks are often categorized by their capitalization (or market cap). Many mutual funds invest primarily in one of these sizes and are thus classified as large-cap, mid-cap, or small-cap funds.

Balanced Funds

Balanced funds mix some stocks and some bonds. A  typical balanced fund might contain about 50-65% stocks, and hold the rest of the shareholder's money in bonds and cash.

Global/International Funds

Global and international funds invest in foreign companies. In general, international funds are much more volatile than domestic funds. International funds generally invest only in foreign companies, while global funds may invest in some U.S.-based companies in addition to foreign companies.

Sector Funds

Sector funds invest in one particular sector of the economy: technology, banking, computers, the Internet, etc. Sector funds can be extremely volatile because the broad market will find certain sectors very attractive and very unattractive often in rapid succession.

Index Funds

The index mutual fund owns a full participation in some portion of the stock market. An index fund matches the shareholdings of a target index, such as the Standard & Poor's 500 Composite Stock Price Index (S&P 500).

What Should I Consider When Choosing A Mutual Fund?

To ensure you are selecting the funds that are appropriate for your needs, consider the following:

• Figure out, after taxes and expenses, how much money you actually have to invest.
• Determine what your financial goals are. Are you investing for retirement? A child’s education? Or for current income? If so, do you need tax exempt?

• Consider your time frame. Do you need the money in a few months or in ten years? The longer your time horizon, the more risk you may be able to take.
• How do you feel about risk? Are you willing to tolerate the ups and downs of the financial markets for the possibility of greater rewards?

Few investors have the time, the expertise or the technology to follow the financial markets not to mention addressing the issues outlined above. All this information will have a direct impact on the funds you choose.  Thus, it is very important to contact a financial advisor in making this choice.