Mutual Funds - The Common Man's Investment

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    Nov 22, 2012
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Mutual funds may be the common man’s investment vehicle. There are several variations under the mutual funds umbrella that make it less complicated for investors to enter the stock market because mutual funds are professionally managed. As easy as it sounds, there is some important information a potential investor needs to understand before taking the plunge.

A mutual fund is a professionally managed group of securities in which investors pool their money. Mutual funds had their beginning in 1822 when King William I of The Netherlands established the first pooled investment. The investment concept spread through Europe and eventually to the United States in the 1890s. The first modern US mutual fund was created in 1924. 

The two most popular types of fund are open-end and unit investment trust. Open-end funds are the most common. These funds require that the fund be willing to buy back investors’ shares. Exchange traded funds, or unit trusts, are open-end funds that are bought and sold on an exchange.

Mutual funds are also classified by their investment focus in specific areas. The most sought after investment vehicles are:

  • Money Market funds – These funds are mandated by law to invest in low risk, short-term interest rate investments like certificates of deposit and government securities.
  • Bond funds – a bond fund invests in bonds and other debt instruments that include government, corporate and municipal bonds.
  • Stock or equity funds – Investments in this type of fund generally come from stocks or equities chosen on the basis of a fund’s objectives.
  • Hybrid funds – This type of fund is typically a combination of the stocks and bonds.
  • Sector funds – These funds invest in stocks within specific sectors of the economy and business.

Like any other investment, mutual funds have advantages and disadvantages. Mutual funds are considered good investments because of their diversity of investments, quick liquidity, government oversight, professional management and customer service. In short, the investment requires little direct action by the investor.

Like any investment, mutual funds have the disadvantage of unpredictability. Experts also note that mutual funds typically carry fees that can reduce gains. In fact, investors usually pay a fund’s operating expenses. Investors also have very little, if any, control over the daily activities of the fund in the market.

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