MUTUAL FUNDS
Mutual Funds are a form of investment that differs from other investments in that they are a large pool of investments that individuals can purchase portions of. Mutual funds are generally founded on the idea of an investment portfolio in which investors attempt to diversify their investments widely to control for risk or to focus on investments they are comfortable with.
There are a variety of mutual fund types available that operate somewhat differently, here is a breakdown:
- Index Funds – These funds are based on a stock index such as the S&P 500 or the Dow Jones Industrial Average. Their strategy is to hold every single stock listed in their chosen index. This is advantageous because returns coincide with the performance of that index and management fees are minimal because there is no need for a manager to decide which stocks to invest in.
- Managed Funds – Managed funds are any mutual fund that has a manager making decisions on where to invest the fund’s money. The idea is that the manager is so experienced with these investments that they can beat the returns in the stock market as a whole. This type of fund generally comes with management fees that are taken out of the fund owners earnings.
- Money Market Funds – A money market fund is different from other funds in that it invests in the money market rather than the capital market. The money market consists of short term financial instruments such as government debts, commercial paper, and Certificates of Deposit. These funds attempt to reduce risk by diversifying among a wide variety of less risky debt.
- Equity Funds – These are the most common types of mutual funds and can be either indexed or managed funds. The key differentiator is that they invest in the capital market using instruments such as stocks and bonds rather than the short term instruments used in money market funds.
- Hedge Funds – These are the most distinctly different of mutual funds. They are used by extremely wealthy participants and are rarely available to the average investor. They pool resources from investors and their actions are loosely regulated by the government. These types of mutual funds allow managers a high level of flexibility to employ whatever strategies they would like.