Mutual Funds

A mutual fund is an open-end investment company that invests money of its shareholders in a usually diversified group of securities of other corporations, as defined in the Merriam-Webster dictionary. Mutual funds help with financing and investing opportunities. They give the small investors a chance to invest their money in other areas besides stocks and bonds. There is multiple mutual funds to choose from and different reasons why shareholders should choose them. As popular as mutual funds have become, there is downfalls to them like most investment opportunities. In 2003, mutual funds were giving a bad name when a scandal was brought public. These opportunities and issues will be discussed.

Becoming major suppliers of funds in the financial market, mutual funds have become a very popular investment in recent years. Because of the diversity of investments, portfolio management’s expertise, and liquidity, mutual funds have grown rapidly over the past few years. One of the most popular group’s investing in mutual funds is people with self-driven retirement plans. This provides professionally handled money and pooled risk. There are more than 8,000 different mutual funds, with more than 88 million households owning shares of one or more.

Mutual funds pool investments by individual investors and use the funds to accommodate financing needs of governments and corporations in the primary markets. Investments in securities in the secondary markets are made as well. Mutual funds are used both by governments and corporations that need funding, which gives small investors a place to invest their money.

Small investors have limited funds to invest, so mutual funds provide an easier way for them to diversify their investments. Mutual funds pay out higher dividends then money markets or savings accounts, and the dividends are paid out faster with mutual funds then with individual bonds. Small investors can’t afford to diversify with such small amounts of money, so mutual funds allow them to invest in holdings of 50 or more securities. The minimum investments for some of these securities may be only $250 to $2,500. Mutual funds are a very low-risk investment, but still have credit and interest rate risks attached. Since the investments are spread out among a number of bonds the risk is lowered, more so then if it was invested all in one bond. Mutual funds are also more liquid then regular bonds; they can be bought and sold more easily. Mutual funds are also managed by experienced portfolio managers, so the investors don’t have to worry about managing the portfolio themselves.