There are 4 types of mutual funds. We all know that investing is important, and mutual funds are among the best investments to supplement your regular income or grow your wealth over time.
Funds can vary, and each has its own set of risks and rewards. There are thousands of mutual funds, but most mutual funds fall into one of these categories.
Table of Contents
What are Mutual Funds?
A mutual fund is an investment that allows people to pool their money together and invest it in various securities, such as stocks, bonds, and other assets. It is managed by professional money managers in an investment company who try to maximize returns and minimize risk.
The Four Types of Mutual Funds
In general, there are four types of mutual funds.
Equity Funds
- Funds invested in stocks or bonds
- Over time, the fund usually goes up so it’s worth more than you first bought it
- Ideal for high-risk tolerance investors seeking capital growth
- Equity mutual funds are run by professional money managers who attempt to beat the market by picking stocks they believe will outperform the rest of the market.
Fixed Income Funds
- Invests in fixed-income securities like bonds
- Offers a steady income stream and capital appreciation for investors
- Less risk and less volatile than stocks
- These funds tend to be less volatile than stock funds, which means your investment is less likely to lose value.
Money Market Funds
- Funds that invest in short-term debt like bank loans, lease payments, etc.
- Very stable fund, since these funds are invested in high-quality debt
- Good choice for investors who want to avoid risk, park their cash, as well as a decent return
- These types of investments are considered to be extremely low-risk
Index Funds
- A type of fund that invests in a specific market index, such as S&P 500 or PSEI
- Index funds are passively managed, which means they are not actively managed by a portfolio manager
- A good way to invest in a group of stocks that represent the stock market as a whole
- Index funds can be a good choice for investors looking to generate passive income, as they offer diversification and low expenses.
What is a Mutual Fund?
A mutual fund is a financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets.
Managed by professional money managers, mutual funds aim to produce capital gains or income for the fund’s investors. The portfolio is structured and maintained to match the investment objectives stated in its prospectus.
Mutual fund companies offer individual investors access to diversified, professionally managed portfolios at a low price, which makes them an attractive option for those looking to invest without having to pick individual stocks or bonds themselves.
What is Passive Income?
Passive income is when you earn money without having to do any work. For example, if you own a rental property, you can earn passive income from the rent tenants pay. Another example is if you have a website and people buy products through it, you can earn passive income from the commissions.
Why Do People Buy Mutual Funds?
People buy these funds because they can pool their money together with other investors, spread the risk around, and invest in a group of stocks or bonds. Mutual funds allow diversification. It also reduces risk so that if one stock goes down, the others might go up.
Benefits and Risks of Mutual Funds
When investing in mutual funds, it’s essential to understand the potential risks and rewards. While it can offer various benefits, there are also some potential drawbacks.
Benefits
Two main advantages stand out: professional management and diversification.
Professional management can greatly benefit investors who don’t have the time or expertise to manage their portfolios. Mutual fund managers are experienced professionals responsible for making investment decisions and managing the fund’s day-to-day operations.
Another benefit of mutual funds is diversification. Investing in a fund can gain exposure to various asset classes and investments. Diversification helps reduce your overall risk by providing a cushion against losses in any area. Mutual funds typically are easy to buy and sell. You can purchase them through a financial professional or online broker. You can also sell your shares at any time by instructing your broker to do so.
Risks
Every potential investor should be aware of a few risks before deciding to invest their hard-earned money: market risk and fees.
The first risk is that these investments are subject to market risk, which means that the mutual fund’s value can go up or down in response to changes in the overall stock market. Even if you pick a fund with a good track record, there’s no guarantee that it will continue to perform well in the future.
Another risk is that fees and expenses can eat into your investment returns. Make sure you understand all the fees associated with a particular fund before you invest, as they can significantly impact your bottom line.
Frequently Asked Questions
What types of mutual funds are there?
There are 4 main types of mutual funds. They are equity, fixed income, money market, and index funds.
How are mutual funds priced?
They are priced in different ways, depending on the type of fund. For example, index funds are priced based on the value of the underlying securities, while actively-managed funds are priced based on the fund’s Net Asset Value(NAV).
NAV is calculated by taking the total value of the mutual fund and subtracting any liabilities. To compute NAV per share, divide NAV by the number of shares outstanding.
How Are Returns Calculated for Mutual Funds?
When you invest in a mutual fund, you pool your money with other investors to buy a portfolio of stocks, bonds, or other securities. The fund’s managers calculate the return on your investment based on the performance of the securities.
There are four main types of returns that you can earn: interest, dividends, capital appreciation, and realized & unrealized gains.
Are mutual funds a safe investment?
Like any other type of investment, there are risks involved with mutual funds. For example, if the market value declines, your assets may lose value. Additionally, fees and expenses can eat into your returns. Despite these risks, mutual funds can be a safe investment if you carefully choose the right ones.
Can mutual fund shares be sold at any time?
Yes, you can sell your mutual fund shares at any time. However, it’s important to note that there may be fees associated with selling your shares, and depending on the type of the fund, you may also owe taxes on any gains.
Which mutual fund type charges the highest fees?
Actively managed mutual funds are those where a team of professional investors manages the fund daily, deciding which stocks or other assets to buy or sell. This management comes at a cost – these funds typically have higher expense ratios than different types of mutual funds.
For example, actively managed funds following an expense ratio of 1% will charge $10 (Php 550) in fees for every $1,000 (Php 55,000) invested.
Money market mutual funds usually have the lowest fees since they are passively managed. Mutual funds can have an expense ratio as low as 0.04% or even 0.01% for some bond funds.
What mutual fund type has the investment objective of capital appreciation?
Equity funds. Equity funds are generally growth funds and it seeks to achieve capital appreciation by investing in companies with solid earnings growth potential.
Final Thoughts
There is no one-size-fits-all solution when it comes to investing in mutual funds. The key is finding the one that suits your individual needs and goals. Use these steps as a guide, and you’ll find the best investment for you.
Where do I invest mutual funds in Philippines? Do you know some providers? Thanks
Some of the best mutual fund companies in the Philippines: Sun Life, ATR KimEng, PhilAm Fund.
I’ll write more about this, soon :)