A mutual fund is one of the more popular investment schemes on the market today. It is particularly attractive to investors who plan to let their stock portfolios sit and accumulate wealth slowly over time rather than trade actively on a daily basis. There are numerous advantages with this sort of investment fund.
What is a Mutual Fund?
A mutual fund is a pool of money collected from various investors and used to purchase securities on the stock market. Investors turn over their capital to a money manager who control the focus of investments and otherwise oversee their management. The stated purpose of a typical mutual fund is to create capital gains and income for the investors.
A mutual fund is distinct from investments in individual securities for different reasons. Government oversight exists for a typical mutual fund because malfeasance on the part of the money manager is a real potentiality. The diversity of a mutual fund also distinguishes it from individual investments because any money contributed to the fund is spread out over a wide variety of stocks, bonds and other financial instruments.
Types of Mutual Fund
There are three kinds of these funds. The varieties are known as open-end funds, closed-end funds and unit investment trusts. Each has its particular advantages and disadvantages for investors.
• Open-end funds are the most common type of mutual fund. In fact, people use mutual fund as a synonym for open-end fund. They describe the two other, distinct forms of funds with their own titles.
An open end fund has certain restrictions that apply to the way its managers operate it. These funds must offer, or otherwise demonstrate willingness, to buy back shares from each investor at the end of every business day. This allows investors to take a day’s profits and walk away with them. These funds also sell shares daily. The number of possible shares in a fund is not limited.
• A closed-end fund usually sells shares to the public during an initial public offering (IPO) and then does not offer sales again. Investors who want to sell their shares must seek other investors willing to purchase them because the fund will not buy them back. Like an open-end fund, though, the closed-end fund is overseen by a manager who controls the investment focus of the fund.
• A unit investment trust is similar to both of the other types of mutual funds. While they only sell shares once at an IPO, like closed-end funds, shareholders can sell their holdings back to the fund or to other investors.
Advantages of a Mutual Fund
The advantages of a mutual fund are mostly for people who want to hold onto their portfolios for long periods of time. Retirement investing often relies heavily on mutual funds because they tend to grow slowly but with some certainty. They are not as volatile as investments in individual securities which can vary in value wildly from one day to the next. This dependability is gained from their diverse investments, which do not place large proportions of the funds capital in any one stock or sector.
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