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The Basics of Mutual Funds

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Authored by Lori Godin in Investments 
Published on 02-24-2009

Mutual funds are used to create a group of investments from a variety of people that are used as one large investment opportunity to create larger returns. The mutual investments are used to create a return for everyone involved while ensuring that there are many sources of investments that are used to ensure that there are not large amounts of money lost on one particular type of investment.

There are three basic types of mutual funds. These types of mutual funds are equity funds, fixed income funds and money market funds. Equity funds are stocks which are purchased and when these stocks are purchased there is equity purchased in the company that has issued the stocks. The second type of mutual funds is fixed income funds, which are essentially bonds. Bonds mean that you are loaning money to the company in return for interest that the company pays in return for the use of the money. Money market funds have the lowest return and are often some of the shortest term investments when it comes to mutual funds. These often consist of money being lent to the government and have an interest rate which generally higher than a savings account.

When shopping for mutual funds, the consumer can choose one or a combination of all of the above investment types. It is important to remember that the higher the risk of the investment the higher the interest rate and therefore the higher rate of return.

An investor can invest an amount that they feel comfortable with in the mutual funds, from five hundred to five thousand dollars. There are three ways that the money is made from the investment. Here are the three ways that money is earned from the mutual fund:

  • Stocks and bonds are used to create dividends and interest which will result in a payment for the person that has invested in the mutual fund.
  • The stocks that are used in the investment portfolio are measured and when they rise in value they are sold and the profits are divided between the members of the fund.
  • The stocks that are used and remain unsold may increase in value and be resold to the members of the mutual fund which will create profits for everyone that is involved.

What are the benefits of mutual funds? There are many benefits to choosing mutual funds within your investment strategy:

  • Most investments in mutual funds are often low risk and come with a rate of return which is a higher interest rate than a savings account.
  • Mutual funds can be opened for a specific period of time.
  • Mutual funds are often used to diversify the investments and ensure that all of your eggs are not put into one basket throughout the investments.
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