A mutual fund is simply the gathering of money from several people or even companies, managed by an investment manager or an investment company, for the benefit of the shareholders. There are many types of mutual funds, depending on the type of investment the money is used for. The investment portfolio managers or company is paid a certain fee in investing and managing the fund. Because of this, the shareholders save themselves the trouble of trying to analyze market trends or even financial statements. It’s like one gives money to the fund, and the money is used in investing in some form of business or the other. One need not worry about its management.
Investment funds is one of the easiest ways to save money and get returns higher than other investments. One must be wise, though, and begin investing only in the type of mutual fund that one is familiar with. Remember, different mutual funds are placed in investments of different categories. Choose the one that you are more familiar with.
One only needs to have a brokerage account to begin investing in a mutual fund, just like investing in shares.
A mutual fund has two types based on the number of shares. A closed-end mutual fund has a specified number of shares that is bought and sold to shareholders. An open-end mutual fund has no specified number of shares; hence, many can actually join the fund and its pool of money increase.
Based on the costs for selling or buying mutual funds, there are three types. These are the Front Load, Back Load, and the No Load mutual fund. The first one charges a fee for buying a share; the second type charges only a fee once you sell a share; and the third one imposes no such fees. Remember, though, that all mutual funds charge a management fee depending on the type of fund and length of commitment to the fund.
If you intend to purchase a share of a mutual fund, do some research first about its past performance. Compare it with the mutual funds of the same type. Also consider the period you plan to commit yourself to the mutual fund. Check also the reputation of the investment manager and his length of stay in overseeing the investing of the mutual fund. When managed properly, one can expect good returns from a mutual fund. But remember, that isn't easy to perform investment management performance measurement correctly.
However, investing in mutual funds is best choice only for small retail investors that chose passive way of investing. When investing in mutual funds you don’t need to much by yourself, but you have to pay for that.
Such investment funds normally have higher fees than ETF (exchange traded) funds or other index funds. So if you trust investment manager of the fund and you are sure that he will calculate all the valuation multiples as price and earnings ratio (also called as P/E ratio) and P/NAV ratio (price to NAV) and chose stocks properly, then it is ok. Otherwise, better look for other investment alternatives.