There are many forms of investments that one may consider if they have some money to put aside for future use. Mutual funds are among the most popular options because they are often used saving money while providing some returns at the same time. The idea is to pool resources from many investors so as to have a huge amount of capital to earn reasonable returns shared that are distributed to the investors as dividends.
Typically, a fund is divided into many units with each of them representing a certain value. The value keeps changing depending on the value of the investments made. An investor buys units much like they do for stocks in the stock market. The purchase of units can be done in one instance or on a regular basis. The latter option favours low income earners who may not have a lot of resources at their disposal initially.
Different type of funds exist. Some only invest in government paper and are thus termed money markets. Others invest in stocks only and a third type may have a mixture of government paper, stocks and even real estate. These are known as balanced funds. An investor will chose the arrangement that suits them most depending on their risk appetite.
In general, funds have some of the lowest risks as compared to other investment options. Because of this, the returns associated with them are also comparatively lower. Stocks have greater volatility but also have the potential for the greatest returns. Most funds are pegged on stocks and government paper hence the returns will also vary depending on the performance of these instruments. This makes it quite difficult to make projections on future earnings.
The ease of entry and exit is a major advantage of this kind of investment. Buying and selling of units is comparable to that of stocks. This makes the investment quite liquid. What this means is that one can easily convert their units into money simply by selling back to the fund manager. This is in contrast to other investments such as real estate in which selling of properties tends to take much longer.
One of the other major advantages of this form of investment is diversification. What this means is that the pooled resources are put in different classes of assets which may include stocks, treasury bills and bonds and even real estate. Diversification ensures that the risks associated with one asset class are mitigated by other asset classes. It also increases the chances of having good returns in case one of the asset classes experiences growth and both the others.
Funds enjoy what are referred to as economies of scale. These are simply benefits that arise from having a large amount of pooled capital as well as the increased bargaining power. Fixed costs such as commissions and other administrative costs are borne by all the investors equally which serves the reduce the average cost. Such benefits cannot be enjoyed by an individual investor who in most cases has to cater for their own administrative costs.
A mutual fund allows an investor to buy into a professionally managed portfolio. Without such a fund, professional management of wealth would be a preserve of high net worth individuals. The otherwise to this is that the fees charged reduce the returns to the investors. Such fees may lead to considerable losses if the fund does not make a profit on its investments.
Typically, a fund is divided into many units with each of them representing a certain value. The value keeps changing depending on the value of the investments made. An investor buys units much like they do for stocks in the stock market. The purchase of units can be done in one instance or on a regular basis. The latter option favours low income earners who may not have a lot of resources at their disposal initially.
Different type of funds exist. Some only invest in government paper and are thus termed money markets. Others invest in stocks only and a third type may have a mixture of government paper, stocks and even real estate. These are known as balanced funds. An investor will chose the arrangement that suits them most depending on their risk appetite.
In general, funds have some of the lowest risks as compared to other investment options. Because of this, the returns associated with them are also comparatively lower. Stocks have greater volatility but also have the potential for the greatest returns. Most funds are pegged on stocks and government paper hence the returns will also vary depending on the performance of these instruments. This makes it quite difficult to make projections on future earnings.
The ease of entry and exit is a major advantage of this kind of investment. Buying and selling of units is comparable to that of stocks. This makes the investment quite liquid. What this means is that one can easily convert their units into money simply by selling back to the fund manager. This is in contrast to other investments such as real estate in which selling of properties tends to take much longer.
One of the other major advantages of this form of investment is diversification. What this means is that the pooled resources are put in different classes of assets which may include stocks, treasury bills and bonds and even real estate. Diversification ensures that the risks associated with one asset class are mitigated by other asset classes. It also increases the chances of having good returns in case one of the asset classes experiences growth and both the others.
Funds enjoy what are referred to as economies of scale. These are simply benefits that arise from having a large amount of pooled capital as well as the increased bargaining power. Fixed costs such as commissions and other administrative costs are borne by all the investors equally which serves the reduce the average cost. Such benefits cannot be enjoyed by an individual investor who in most cases has to cater for their own administrative costs.
A mutual fund allows an investor to buy into a professionally managed portfolio. Without such a fund, professional management of wealth would be a preserve of high net worth individuals. The otherwise to this is that the fees charged reduce the returns to the investors. Such fees may lead to considerable losses if the fund does not make a profit on its investments.
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