Basic Types and Categories of Mutual Funds
Flexibility: Mutual Funds Have Several Uses and Applications, All of the above benefits of mutual funds overlap into simplicity and flexibility. You can invest in just one fund or invest in a wide variety. Automatic deposit, systematic withdrawal, 401(k) plans, annuity sub-accounts, dividends, short-term savings, long-term savings, and nearly limitless investment strategies make mutual funds the best overall investment type for both beginners and advanced investors.
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Think of mutual funds as investment baskets of securities. Each basket has its own objective and manager (or management team). The manager also has a team of analysts that assist in doing the research. Also keep in mind that, when it comes to management, mutual funds fall into two primary categories — one is active management and the other is passive management. Managers of actively-managed funds will use their resources to try and ”beat the market,” which is to say that they’ll attempt to outperform a certain benchmark, such as the S&P 500 index. However, the manager of a passively-managed mutual fund will not try to beat the index but will instead buy and hold a basket of stocks that will replicate the holdings and performance of the index.
Mutual funds can be structured in several different ways, including open-ended mutual funds vs. closed mutual funds being one particularly important distinction. To learn more about the way mutual funds are organized, you’ll want to read How a Mutual Fund Is Structured. You may also want to delve into Making Money from Mutual Funds, which explains how investors actually profit (or experience losses) from owning a stake in a mutual fund.
Other Types of Mutual Funds: Index Funds. Today, not all funds are managed by a financial manager. Index funds use a computer program to buy all of the stock in a particular index, such as the Russell 3000 or the S&P 500, regardless of how they’re performing. They don’t have to do research or try to time the movement in the market to buy or sell at the ”right” time. Index fund fees, therefore, are generally much lower than the fees for managed funds, and, therefore, the return on investment is higher.