Mutual Funds Pool - a Selection of Investment Instruments
A mutual fund is a financial instrument that invests in different types of securities. They invest in money market instruments, bonds, stocks, and different share classes.
Classes and Investment Instruments
Investors can choose from class C, B, and A shares. The last type has a front-end sales load and is preferred by investors. The reason is that it goes with low annual expenses and fees. As a rule, this class gives investors more voting rights than class B and C shares. Mutual funds issue shares that are redeemable and can be purchased in a secondary market or from the entity itself.
Fees and Expenses
Investors pay redemption, purchases, account, and exchange fees. Holders that choose to transfer or switch to another fund may be required to pay an exchange fee. Investors who redeem or sell shares pay redemption fees. Also known as back-end load and exit fees, they are intended to discourage investors from selling shares. In addition, shareholders may have to pay deferred sales charges and distribution and management fees. Investors pay purchase fees when joining the fund. Financial entities that assess fees are required to disclose them before the deal. Deferred sales charges are assessed when investors sell their shares. The amount to be paid depends on how many years the shares are held. Typically, it is a percentage of the shares’ value, and it is lowest at the end of the period. Shareholders also pay account and management fees for the maintenance of their accounts.
Different Types of Investment Vehicles
Investors can choose from sector, index, income, growth, and other types. Growth funds, for example, invest in a diversified portfolio of securities and in businesses that reinvest their shares in R&D, acquisitions, and expansion. They are more volatile and riskier for investors. Moreover, shareholders are usually paid no dividends. Unlike them, income funds pay dividends on a regular basis. They invest in stocks and hold a selection of instruments. These include dividend-paying securities, money market instruments, preferred shares, and corporate, municipal, and government debt securities. As a rule, they invest in fixed income, high yield, and investment-grade corporate securities. It should be noted that the price of shares goes up and down with interest rate fluctuations. This is why, managers often invest in a variety of instruments that reduce risk for investors. Some entities, however, invest in floating-rate debt and corporate junk bonds. Bank loan and high yield bond funds are intended for high-risk investors.
In addition to these options, investors can choose from sector and index funds. As the name suggests, the latter follow a certain index such as Russell 2000, the Dow Jones Industrial Average, and S&P 500 Composite Stock Price Index. Sector funds, on the other hand, invest in the stocks of companies that operate in a particular sector or industry. They can be closed-end or exchange traded and invest in a certain sector, for example, utilities, communications, or energy. This is a riskier investment vehicle because of the lack of diversification. While they are more volatile, there is a large selection of sector funds to choose from. The list includes precious metals, health care, natural resources, and utilities. Investors can choose from real estate, communications, financial, and technology sector funds. For some people, they are better than other investment vehicles. This depends on the ability of investors to pick hot sectors with a significant growth potential. One way to benefit from investing is to use them for portfolio diversification. Some people also invest for speculative purposes. They bet on stocks and other instruments that are expected to increase in value in the near future. The goal is to make significant profits over a short period of time. In addition to these options, investors can choose from prime money market, retirement, total bond market index, and international stock index funds, among others.
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