Mutual funds, also called open- end investment companies are the dominant investment vehicle today. They combine the limited funds of small investors into large amounts, by means of taking the advantages of large-scale trading. Mutual funds are the most profitable option for investors, whose portfolios are not large enough to be spread across a wide variety of securities. It is quite expensive to cover the brokerage and trading costs, while you are buying just a few shares of many different firms. Therefore, there are a lot of investment companies that offer mutual funds that target small investors with similar financial goals.
Mutual funds are an investment club where investors are assigned a pro-rated share of the total funds according to their investment capacity and needs. The enduring challenge is to ride the current economic wave well in order to foster the production of eye- popping returns. Managing a collection of funds under the same roof, makes it much easier for investors to allocate and switch assets across different sectors and fund types.
Money Market Funds
For a short- run goals, investors prefer investing in money market instruments. Money market funds are the best choice for investors seeking liquidity. Generally speaking, liquidity is accomplished by purchasing reliable, short- term, low-risk securities like U.S. treasury and municipal notes and bills. Furthermore, there is no tax implications such as capital gains or losses associated with shares of stock redemption.
Equity Funds
Equity funds invest exclusively in stocks. They are the basic and most popular stock- buying funds in the United States. Equity funds are usually diversified long-term investments of well-known companies. Frequently, these funds put between 4% and 5% of the total assets into money securities to strengthen fund's liquidity position to meet potential redemption of shares of stocks.
Balanced Funds
These funds hold both equities (stocks) and fixed- income securities (bonds) in relatively stable proportions 60% and 40%, respectively. This asset allocation minimizes the investment risk without sacrificing long-term growth and current income. Balanced funds tend to buy shares of stocks of established businesses. Consequently, these funds are considered conservative investments that portfolio managers constantly try to adjust to the changing economic conditions.
Asset Allocation Funds
Asset Allocation Funds are similar to Balanced Funds in terms of investing in both: stocks and bonds. While balanced funds usually limit themselves to a predetermined asset mix, asset allocation funds can vary their concentration in any class from 0% to 100% based on portfolio manager's forecast of the securities markets. All investments have their moments of glory and shame. There is no impeccable mixture of securities.
International Funds
Many funds have international orientation. International funds invest in securities of firms located overseas. These securities are riskier, because they are not only subject to currency variations, but also to political instability and insufficient information. Being a prospective investor, try to purchase an international fund that invest the bulk of its money in developed countries with stable economic conditions, and a small portion in risky emerging markets.