What Is Mutual Fund? Free Essay Example

In the age of capitalism, people seek many ways to achieve financial stability and safety. One method people use to achieve that goal is investment. Mutual funds have been one of the preferred type of investment or retirement plans because the investment portfolio is flexible and can be adjusted by the fund manager to suit the economic situation. Instead of investing in a specific government bond or company stock, mutual funds combine different forms of investment into a single portfolio. The three most popular types of mutual funs are stock funds, bond funds and money market funds.

They differ by the objective and length of investment. Stock funds are investments in the stock market. The main objective of this investment is to either increase the value of the portfolio by growth or to earn regular incomes by collecting dividends or a combination of both. The stock market is a very large market with different sectors of varying risks. The two main types of stock funds are growth funds and value funds.

Investment in growth funds focus on growing companies that don’t pay out dividends but can increase the value of their stocks through growth.

It is geared towards investors who seek long term gain. On the other hand, value funds or income funds are invested to older companies that regularly pay dividends. These choices are available to potential investors so they can decide for themselves what they want in their investment. Bond funds are mutual funds that invest in several government or corporate bonds and other securities.

They pay dividends periodically which will suit an investor looking for periodic income instead of a long-term growth. The bond funds are different from individual bonds in one key element: reinvestment possibilities.

In individual bonds, the principal is returned once the time period expires. In bond funds, the principal is immediately reinvested by the fund manager upon its expiry. The money market funds refer to short-term investment funds that mature within 13 months. It is similar to money market deposit accounts offered by commercial banks. The main advantage of this type of funds is its low risk, due to the lack of exposure to economic changes. They usually invest in short-term bonds and commercial papers that are highly liquid.

Due to the low risk nature of the investments, these investments usually have stable values and did not incur losses to the investors. The different types of mutual funds offer investors different ways of investing based on their preferred objective. Those who seek long-term capital appreciation should invest in stock funds that aim at new, growing companies. For those seeking regular income and dividends can look into bond funds or value funds. Investors who are looking for low risk, stable, and high liquidity investments can invest in money market funds. In mutual funds investment, there is one for everybody.