Capitalist Life : What Are Mutual Funds?

What are Mutual Funds?

Most people who have never dealt with them before wonder what are mutual funds in relation to other forms of investment. In fact, a mutual fund is nothing more than an investment in a diversified portfolio that is run by the company offering the fund. Similar funds offered in the UK and Europe are called Unit Trusts, though they are not exactly the same.

Basically, a mutual fund takes the money invested by individuals and companies, and uses it a variety of forms of investment such as stocks assets, real estate and bonds in a portfolio, the share of which belongs to each investor in the proportion of the amount of money they have invested. There are other types of funds , such as a Closed End Fund where a fixed number of shares are sold at a time , and these can later be sold on a secondary market, and also Unit Investment Trusts that differ from Unit Trusts in that in the former you buy shares in the company holding the units and in the latter you buy units themselves.

There are some aspects of a fund are necessary for it to be termed a ‘mutual trust’. Among them are the fact that if you want to invest you have to purchase the shares from the fund, and not from the stock exchange, for example, and having been purchased, you can sell them back to the fund and not on the stock exchange.

A mutual fund can also create new shares to cater for more investors, which means that there is no limit to the number of shares. For example if 100 people were originally in the fund, then another 100 can be accommodated by creating 100 more shares. No one loses since share values are not diluted, but eventually a trust can become too large and then a limit is places on the number of investors.

There are certain aspects of these funds that appeal to certain types of investor. For example, they are attractive to those who do not want all their eggs in one basket. They can spread their investment without having to manage an individual portfolio. Some people like doing this, but to others it is a chore. They prefer that professional managers look after their investments.

A mutual trust is also affordable to those who do not want to make large investments. You can purchase your mutual funds on a monthly basis if you wish, each month paying a certain amount to purchase more. This is a great way for newbies to get involved in the investment market. The great thing about these funds for many people is that they can cash them in at any time. No waiting or complicated procedures to go through. No stockbrokers: just a phone call, sign a form, and you can get your money.

There are few disadvantages for the new investor, but for the experienced there are one or two. For a start you have fixed costs to pay, and they do not vary if the fund is doing badly, and of course the experienced investor has no control over the contents of the portfolio. That is managed for everybody. For everyone it is the same, and if you have a better idea on how to fill the portfolio, then tough. It has nothing to do with you.

Another disadvantage for people used to dealing with stocks and shares is that there is no real time pricing. You cannot buy some funds then check them up on the internet and sell when they are on a high. It does not work like that. A mutual trust is not a short term investment. Most money is made over the longer term, and while some shorter term gains might be sought by the investment managers, most money is invested for longer term growth.

There are a number of different types of mutual fund, and you should take professional advice as to which is most suited to you. The major factor to keep in mind when considering mutual finds is that you are not investing in one single company and you will not make remarkable gains or losses over short periods of time. These funds are for investing nest eggs rather than for gamblers. There is little gambling involved in a mutual fund.

True, they can lose money, but not spectacularly so, or if they did, then every other investment would also crash. To put it another way, you would have more chance of surviving a Wall Street Crash with a Mutual Fund, than with a share in Wallmart.

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