A mutual fund is a company that pools money from many investors and invests the money in stocks, debentures/bonds, equities, short-term money market tools or other securities. The income produced through these investments plus the appreciation of capital earned by the scheme are shared by its entity holders depending on the units possessed by them. Thus, mutual funds can be well thought of as financial middleman in the investment trade who collect funds from the people and invest on behalf of the investors. The Investment objectives outlined by a Mutual Fund in its prospectus are binding on the Mutual Fund scheme. The investment goals state the class of securities in which a Mutual Fund can invest. Generally the portfolio of Mutual Funds comprises of various asset classes such as bonds, debentures, equity, and government securities, equipment. Stocks and bonds are the primary assets of the mutual fund while investing in equipment etc. take a back seat.

Like any other corporation, in exchange for cash the mutual fund issues shares of stock to investors. However unlike most corporations, mutual funds do not issue a fixed quantity of stock but with new investments new shares are issued. A mutual fund may be either an actively managed fund or an indexed mutual fund. A fund manager alters actively managed funds regularly in order to maximize their profitability. They fund manager inspects the market and the sectors a fund invests in and reallocate the fund appropriately. An indexed fund follows a different approach by simply taking one of the major indexes and buying according to that index. Indexed funds change much less repeatedly than actively managed funds. However, an active fund is more profit making. Mutual funds provide transparency, efficient performance, liquidity, tax benefits and a wide range of schemes.

You will find different rating systems on mutual funds each with it's own unique methodology. These ratings are designed to provide ratings to the various mutual funds. However these ratings are sometimes deceptive. Some popular high rating systems are just used as a tool to increase the sales of the funds, as people tend to buy funds with high ratings. Though ranking providers are cautious to notify investors that the ratings don't forecast the future yet many investors use it.

Ratings are significant in differentiating between good and bad funds. So do a rigorous research while you assess mutual funds. You must look at the quantifiable and computable features of a fund and also check the returns against the target, costs incurred, taxes liable, risks involved and manager term. Although you can refer the rating systems yet you must not just blindly invest in the funds with best ratings. You must check the rating against the real time performance of the mutual funds.

Mutual funds offer various benefits of diversification including risk reduction by holding different disparate investments. So as the profit graph of different investments move up and down, the aggregate return flatten off the risk.

Due to various advantages, the mutual funds have become a very widespread form of investing. But you must be very careful in selecting the appropriate mutual fund.

You must not be lured into investing in the currently best performing fund. But you must go for mutual funds that have low purchase rate and are high on selling. However, even the good funds cannot overwhelm the trend of market. So be careful in choosing funds that can be strong in a low market trend. Moreover, you must go through the prospectus to read the risk tolerance. Moreover, diversifying into many mutual funds does not diminish your risk or increment your return.

So before moving on to mutual funds in 2007, one final point is that the type of fund wholly relies on your investment goals. Different funds prevail in market and you can choose depending on your aims whether they are retirement, income, expansion, educational needs etc.

Copyright © 2007 Joel Teo. All rights reserved. (You may publish this article in its entirety with the following author's information with live links only.)