Mutual funds are investments in a variety of assets, which are chosen to benefit the investor with a guarantee of regular returns. These investments are usually done through stock exchanges or investment banks. There is no face-to-face interaction between investors […]
Mutual funds are investments in a variety of assets, which are chosen to benefit the investor with a guarantee of regular returns. These investments are usually done through stock exchanges or investment banks. There is no face-to-face interaction between investors and thus the only communication between them is through written correspondence, phone calls or electronic mails. The returns depend on the performance of the underlying security and the quality of the chosen brokerage or financial institution where the investment is made.
Mutual funds generally involve two categories of investments: common and preferred. Common investment securities include stocks, bonds, mutual funds, real estate and securities of all kinds. Preferred investment securities may include foreign securities, municipal bonds, options, certificates of deposit and possibly commodities like gold, equity indexes, proprietary instruments and securities related to foreign countries. Most of these common investment securities are traded on major exchanges. Mutual funds usually invest in these markets, but not exclusively.
Mutual funds may be invested in any number of markets; however, returns vary from the returns of other investments. The markets in which they invest are chosen based on their returns. Thus, while common market investment securities provide stable returns, preferred market securities offer a higher rate of return but have lower risk. Some of these funds even invest in virtually any financial market.
It is important to remember that market returns are rarely perfect. Historical averages can be determined, but investors need not depend on them alone. Frequently market movements affect mutual funds, thus an understanding of portfolio management is necessary to determine expected returns. Proper fund management is important because returns can vary significantly from one fund to another.
An important thing to note is that the amount invested, the type of investments and length of time the investments are held all affect the results. Any returns are much different for those who have longer holding periods. A ten year period is much less favorable than a one-year period due to the higher amount of variation.
In order to maximize returns, mutual funds should be chosen according to the needs of the investor. Individual investors may have different risk preferences. Also, different types of portfolios will have different expectations of returns. Thus, it is important to understand how returns can vary from one fund to another. Proper diversification of portfolios is essential in order to minimize risk and increase returns.