Understanding Mutual Funds

A Mutual Fund is a financial vehicle that allows a group of investors to pool their money together with a predetermined investment objective in mind. Most mutual funds have a fund manager whose responsibility it is to invest the pooled money into many different securities, mainly stocks and bonds.

Your investment in a mutual fund means that in most cases, you are actually buying shares or portions of the mutual fund, thereby making you a shareholder of the fund. Most Mutual Funds are marketed by agents or distribution companies, who market the plans to investors. Mutual funds are also marketed directly as well.

The mutual fund agent also acts as financial advisor to its many different investors. Because of the complex issues which can arise, many agents are required to clear various examinations before they are able of act as an agent.

Many Mutual Funds owners opt to deal with a distribution agency rather than an individual agent, because they feel that they are easier to manage. They also feel that the agency will be able to offer better financial advice to their investors than individual agents.

In today's market, the sales officers, and the other employees of the investment company, usually prefer to approach the investors directly, especially those individuals or corporate clients with a high net worth. With that being said, many Mutual fund sales actually happen as a result of other distribution routes such as direct marketing.

The mutual fund prospectus is a policy, which describes the Mutual Fund's specified investment policy. If you happen to be an investor who has a family of Mutual Funds, more likely than not, it will be managed by an Asset Management Company, which collects the funds from investors and charges a management fee for operating them on your behalf.

Using this model the investors are able to invest across different market sectors, while switching their assets across many different funds, allowing them to reap the benefits of a centralized record keeping system.

Different types of Mutual Funds:

Equity Funds - are funds that invest in stocks, which often hold 4% to 5% of their assets in money market securities. These funds often give a high dividend yield, and will often hold shares of firms, which enables them to realize faster capital appreciation.

Debt Funds - are funds that allow their investors to invest in fixed-income securities. Depending on the type of fund, it will either concentrate on corporate bonds, treasury bills or mortgage-backed securities. Some of the funds also specialize in maturities.

Index Funds- are funds that allow its investors to buy shares, which are included in a particular index, often in direct proportion to each share's representation in that index. The investors need not do a security analysis, because index funds are a passive money making strategy.

Money Market Funds - are funds that invest in short-term, low-risk instruments of the money market. Some of the funds even offer check writing facilities to the individual investors, because the liquidity is often high.

These are some of the different types of Mutual Funds being offered in today's marketplace and is by no means an exhaustive analysis of all of the different investment strategies, which can be offered in your investment portfolio. Some other funds include international funds, which are used to invest in many different securities around the world.