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How to Navigate the World of Mutual Funds

Mutual funds have assisted people all over the world attain their financial objectives since the 1920s and currently account for millions of investors. Investors have to determine which the best types of funds are by considering the different classes available. In order to select the most optimal type of mutual fund, an investor needs to be able to navigate the world of mutual funds.

What Is A Mutual Fund?

Mutual funds have no restriction to number of shares that an investor can purchase or sell hence they are referred to as open-end funds in contrast to close-end funds that limit the number of shares that an investor can trade in the stock market.

In a mutual fund, shareholders with similar objectives pool their resources, and employ the services of a professional fund manager whose role is to obtain the best results in terms of capital and income growth. The risk to an individual investor is minimized by ensuring that the funds are invested in different stocks and bonds in the market.

The investor in mutual funds can buy and sell their shares at any time hence they can obtain cash at any time. It is however important to note that due to the fluctuating nature of the market and the cost of operating a mutual fund , the value of the investment is the net amount , which does not necessarily mean that the investment will always increase in value when redeemed. Management and administration costs are normally stated in the prospectus, and it is therefore important to note them before deciding on the type of fund one wants to invest in.

Types of Funds

There are essentially four main types of funds, namely:

• the stock or equity fund,
• bond fund,
• the balanced fund and,
• the money market fund.

Stock Mutual Funds

Stock or equity mutual funds objectives are capital growth over a time of five or more years, but can withstand share price fluctuations. Stock funds aim to achieve growth in income and capital appreciation .There are different types of stock funds depending on the risk and rate of return of the stock from different companies.

Bond funds

These are invested in the bond market and have a steady income that is slightly higher than money market rates and allows the investor a higher level of diversification with minimal fluctuations in the share prices. It is important to note that Bond funds are different from bonds. Bonds are stated with an fixed yield and usually carry an obligation to be paid at a later date, whereas bond funds are market driven.

Other Mutual Fund Investments

Other Bond Funds include Balanced Funds and the Money Market Funds. Balanced funds are a mixture of stock and equity securities, aimed at giving a balanced return between fixed income public securities and money market securities. Money market funds on the other hand are invested in short term public and private loans and are generally low yielding but secure funds.