Mutual Funds 101: Your essential questions and answers.
Defining mutual funds: here’s what you need to know.
Imagine it’s the beginning of the school year and you’re meeting your new group of students for the first time. You may not know them yet—however, from past experience, you can pretty much predict that their individual capacity to learn will vary. Some will be fast learners, while others will absorb your lessons at a slow and steady pace. Then there will be those who will find things a little more challenging. Yet regardless of their differences, they all aspire towards the same goal: to learn the curriculum. To ensure this happens, you need to understand how each of your students learn as individuals.
Your investment portfolio to a certain degree is like your group students. It has different kinds of investments with different qualities—and each is in your portfolio for a different reason. But they also share a common goal: to increase the value of your savings.
If you understand the investments in your portfolio and how they work (as well as you’ll get to know your students), you can then feel confident that you’ll be able to reach the investment goals you set for yourself.
What is a mutual fund?
A ‘mutual fund’ is an investment vehicle. When you invest in a mutual fund, your money is pooled with that of people with similar investment objectives and invested by professional portfolio managers into securities such as stocks, bonds, money market instruments, and similar assets.
Why invest in mutual funds?
Mutual funds save you the time and energy it would take to build a diversified portfolio on your own. In case you’re wondering why the importance of ensuring your portfolio is diversified— remember the old adage; ‘Don’t put all your eggs in one basket’? Diversification within your portfolio protects you from downturns in specific areas. Because your money goes into a pool, you can invest in a variety of investments for as low as $25 a month. In fact, a single investment in a mutual fund can instantly gain access to capital markets in over 40 countries.
Karen Hubbard, Vice President, Client Advisory Services of Educators Financial Group adds, “With mutual funds, investors also benefit from the experience and training of a professional portfolio manager that chooses and manages the investments based on your specific objectives and tolerance for risk.”
What are the objectives of a mutual fund?
The general objective of any mutual fund is to provide a return that is consistent with the level of risk you are willing to take.
That being said, there are four major groups of mutual funds, each with specific objectives:
1. Growth Funds
Objective: to provide capital appreciation over the medium to long term. Growth mutual funds are generally investments in small to large cap stocks.
2. Income Funds
Objective: to provide income in specific intervals. These funds are suitable for investors who are looking for cash flow to supplement their income. A major portion of the asset is invested in income instruments such as fixed interest debentures, bonds, preference stocks, and dividend paying stocks.
3. Sector/Industry Funds
Objective: to maximize returns by exploiting growth in booming sectors such as real estate, healthcare, and commodities.
4. Value Funds
Objective: to invest in stocks that are (deemed to be) undervalued because of some inherent inefficiencies of the Market.
Since their introduction, mutual funds have evolved to offer an increased amount of choice, reflecting changing investor interests as well as taxes.
Examples? Investors who seek ethical investing can choose socially responsible mutual funds and tax-efficient mutual funds are available for those who wish to receive a regular monthly cash flow from a fund. “Education members trying to structure their income stream for a long retirement may want to discuss the benefits of this type of mutual fund with their Educators financial advisor”, says Chuck Hamilton, CEO and President of Educators Financial Group.
What else should I know?
Like all investments, mutual funds have risk. The value of most mutual funds will change as the value of the investments in the fund goes up and down. Also, there are fees that will affect the return on your investment.
Need a little bit of guidance where mutual funds are concerned?
Our financial specialists are at your disposal to discuss any questions you may have about mutual funds, or any other aspect of your investment portfolio. Contact us today.
