Breaking Down Mutual Funds

You’ve probably heard those envious success stories of investors who struck gold and got rich off of their blind-faith investment. While you might not become an overnight millionaire in your first investing attempt, it is still possible to make a profit through certain kinds of investments with the proper approach to managing your money. Below are the common investment vehicles that could make money start working for us.

Mutual Funds

This investment vehicle consists of several securities and bonds or a combination thereof in its portfolio. What a mutual fund does is pool money from investors to buy different stocks or bonds from different entities; so when an investor places his money in a mutual fund, they essentially own a part of the portfolio which is also composed of varying assets and investment vehicles. If you wish to invest in a mutual fund, it is best to remember:

  • Gains and losses are dependent on the fluctuation of the investments of the portfolio.
  • Different mutual funds have varying investment objectives. It may focus its investments on a specific sector or government-issued bonds with long-term or short-term maturities. That’s why there are different types of funds such as equity funds for mutual funds that concentrate on stocks; fixed income funds for bonds; and money-market funds for treasury bills.
  • Income and capital gains are distributed among shareholders of a mutual fund. Income and capital gains are usually derived from buying and selling of investments in its portfolio.
  • There are fees associated with mutual funds which investors have to consider carefully before owning a portion of the fund. Fees are generally categorized as yearly fees which an investor has to pay to stay invested in the fund; and transaction fees when an investor buys or sells his shares in the fund.

Stocks or Equities

Performance-wise, stocks have proven to be the winner for long-term investments. Stocks or equities represent a stake in a given company. Investors who are stockholders of a company are eligible for a proportionate share of dividends of a company’s earnings.

  • Although stocks are proven to be the best performer among other investments, the biggest drawback is that it is also a riskier investment since the price movement of a stock does fluctuate more sharply.
  • You need to research more on the fundamentals of the company rather than its temporary price movements if you’re looking to invest in the long term.
  • Savvy investors have the advantage of margin borrowing for additional leverage. Stock brokers have the discretion to extend your buying power. This can go both ways: it can magnify both profits and losses, so it’s not for all investors.

Bonds

When a person invests in bonds, they are essentially lending money to a corporation or the government (i.e. the US government issues Treasury bonds). These entities would issue bonds with a fixed-rate interest to raise funds.

  • Bonds are relatively low-risk investments but with relatively low-risk and fixed returns as well.
  • Retirees who often want a level of predictability in their investments would do well to invest in bonds.
  • The main drawback with bonds with longer maturities is inflation. Inflation decreases the purchasing power of a currency and thus, the fixed returns of a bond may not be much when you consider inflation.

It’s always best to exercise due diligence to know which type of investment is most suited for you. After all, there’s no such thing as one-size-fits-all investment approach.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>