Not everybody has the knowledge to manage their own investment portfolio. This requires staying up to date with the latest market-moving news events and being able to analyze how these events will affect the price of various assets. Even if you did possess this knowledge you may not have the time to do all of this. Fortunately, there are options for those who want to reap the rewards of being invested in the asset markets but do not want to manage their own portfolio.
What is a mutual fund?
One of these options is to invest in a mutual fund. This is an investment vehicle that pools together the funds of multiple parties with the objective of investing in the financial markets, usually stocks, bonds, and money market instruments.
How does a mutual fund work?
Mutual funds are managed by financial professionals who make strategic decisions on how to allocate your invested capital into financial instruments. Fund managers aim to obtain capital gains and income through researched investment decisions. Each mutual fund will structure its investment portfolio based upon financial objectives and risk profile described in the mutual fund’s prospectus.
How do investors benefit from a mutual fund?
Investors without large amounts of capital can use mutual funds to gain access to an investment portfolio managed by financial professionals. Mutual funds will share the gains and income derived from the fund’s portfolio with investors in the fund. Each investor will receive monetary benefits proportional to the amount of capital the investor had put into the fund.
Three ways to receive a return
Investors in mutual funds will generally receive a return on their investment in three ways. Two of these methods involve investors receiving a distribution of funds from the mutual fund.
One way to earn income is through dividends on stocks that the mutual fund has invested in or interest earned on the bonds held in the portfolio. This income can be received via a distribution or investors can opt to have the income reinvested into the mutual fund.
Another way investors can obtain a return on their investment is through capital gains. When a mutual fund sells a security for more than it purchased it for, the resulting capital gain will be passed onto investors in the form of a distribution.
Finally, if the mutual fund’s holdings appreciate in value but the fund does not sell the holdings, the value of the ownership shares in the mutual fund itself will appreciate. Investors in the
mutual fund then have the opportunity to sell their ownership shares in the fund to obtain a return on their originally invested capital.
Choosing the best mutual fund
There are many different types of mutual funds with their own risk profile and investment goals. Some mutual fund investment strategies are more aggressive while some are safer with less risk of loss. The best mutual fund for you will depend on your own tolerance for risk and what your objectives are for your investment endeavors.
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of the author and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.
Every type of investment, including mutual funds, involves risk. Risk refers to the possibility that you will lose money (both principal and any earnings) or fail to make money on an investment. Changing market conditions can create fluctuations in the value of a mutual fund investment. In addition, there are fees and expenses associated with investing in mutual funds that do not usually occur when purchasing individual securities directly.