Mutual funds – It is one of the types of financial instruments through which money is collected from several investors in order to invest it in securities such as stocks, bonds, money market instruments, and other assets. Professional money managers operate the funds of a mutual fund in an effort to generate capital gains or income for the benefit of the fund’s investors.
The group of investment projects of the mutual fund are organized and managed in order to match them with the investment objectives stipulated in the prospectus.
The mutual fund is of a dual nature; it is both an investment and an actual company at the same time. When an investor buys a share from the group of shares that make up the fund, he is buying part of the company’s ownership and assets.
In general, the economy moves slowly, so a large variance in a mutual fund does not necessarily mean that the sector is highly volatile. But if the mutual fund’s price drops over time, the sector in which it invests is likely to be growing slowly.
Ways to get profits
Investors earn returns from the mutual fund in three ways, namely:
- Distribution of dividends and interest on the bonds that make up the fund. The fund pays nearly all of its income out in order to distribute profits to investors. The investor is often given the choice between receiving his share of the profits in the form of a check or reinvesting it and obtaining more shares.
- If the mutual fund sells securities whose price has gone up, the fund will make a capital profit. Most mutual funds distribute this capital gain to investors when dividends are distributed.
- If the price of the securities owned by the fund increases and the fund manager does not sell them, the price of the fund’s shares increases, and selling them in the market will make a profit for the investor. Mutual funds are part of a larger investment company, with the largest investment firms owning hundreds of mutual funds.
Types of mutual funds
- Equity Fund: This is the largest category of mutual funds. As the name indicates, this type invests mainly in stocks. It has subcategories that vary according to the size of the company, the investment plan, or according to local or international investment, and so on.
- Fixed-Income fund: focuses on investments that generate a fixed rate of return, such as government bonds, corporate bonds, or other debt instruments. It is sometimes referred to as a bond fund.
- Index Fund: Its investment strategy focuses on the belief that trying to consistently beat the market is difficult and costly. The fund manager buys stocks that correspond to the most important market indices, such as the S&P 500 index.
- Balanced Fund: invests in hybrid asset classes, such as stocks, bonds, money market instruments, or alternative investments. It aims to reduce exposure to risk in different asset classes. It is also referred to as the “asset allocation fund.”
- Money Market Fund: It consists of safe short-term debt instruments, mostly government treasury bonds.
- Income Fund: It is named according to its objective, which is to achieve a constant current profit. It invests mainly in government debt and high-quality corporate debt.
- The International Fund: also known as the Foreign Fund, and its investments are limited to assets located outside of the home country.The Global Fund invests in assets anywhere in the world, including the home country.
- Specialty Fund: A comprehensive fund consisting of funds that have proven to be popular.
- Sector Fund: It operates according to a strategy directed at specific sectors of the economic system, such as the financial sector, technology sector, health sector, and others. This type of fund can be very volatile.
- Regional Fund: Focuses on a specific geographical area of the world, which may include several countries or one country. The regional fund helps buy shares in foreign countries.
- Socially Responsible Fund: Also known as Ethical Funds, this type of fund invests only in companies that meet certain beliefs or guidelines.
Mutual Fund Features
- Diversify, or mix investments and assets into one group, to reduce risk.
- Ease of trading deliberations in the stock markets.
- Mutual funds constitute economies of scale.
- Professional management of the fund, whereby the competent investment manager is in charge of research, deliberation, and investment management.
- Investors enjoy a variety of options and the freedom to choose managers according to the type of investment and its objectives.
- Transparency is ensured as mutual funds are subject to sectoral laws that ensure accountability and justice for investors.
Disadvantages of mutual funds
- Fluctuating profits.
- Withdraw cash.
- High costs.
- Lack of liquidity.
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