- Mutual funds are collective investments managed by financial services providers.investment image by Kit Wai Chan from Fotolia.com
Mutual funds are investment products that pool the capital from many individual investors to purchase different investment securities. These funds are offered and managed by financial services providers such as banks, brokerage firms and fund families, which are responsible for the trading of stocks and bonds in the fund. There is a wide variety of mutual funds focusing on different areas of the stock market, but there are some general categories into which they can be classified. - Growth funds seek to invest in stocks that are going to rise in value over time so when investors cash in their investment, they receive a larger sum than they originally invested. The investor does not receive dividend income from these funds, with the emphasis being long-term growth. Growth funds tend to buy stock in established companies to protect their investment. However, with all the fund's capital in the stock market, growth funds are prey to the volatility of the market. A growth fund can adopt an aggressive strategy, investing in smaller companies that offer the potential for greater gains but may also have a greater risk of going out of business.
- Income funds aim to give their investors a regular (usually monthly) income from dividend interest payments paid by the institutions in which they hold stock. These funds also may hold corporate, government or municipal debt securities, which issue interest payments for a fixed period. Because of this emphasis, income funds offer less capital growth and so may suit the short-term investor. High-income funds invest in less established securities that may be undervalued but also entail greater risk.
- As the name suggests, balanced funds invest in a combination of stocks, bonds and cash equivalents to achieve both growth and income. Holdings include both equity stocks and debt securities.
- While a stock holding gives investors an equity sake in the company (they own a percentage of it), bonds are agreements of credit, with the investor essentially loaning the company money. In return, the bond issuer agrees to pay back the money at a certain date at an agreed rate of interest. Bond mutual funds focus exclusively on this area of investment. They are seen as more secure, offering fixed returns, but investors may lose out if interest rates vary widely or the company defaults.
- Cash-equivalent funds invest capital in short-term securities that have high liquidity, meaning they can be converted into cash quickly. Such investments include U.S. Treasury bills and bank certificates of deposit. Cash-equivalent funds are considered a low-risk option but also offer the lowest potential for returns.
