HomeOver the last twenty years, mutual funds have become quite popular with more than 80 million individuals investing in them. Investing in them gives everyone the opportunity to get their share of the market, and if they deliver, money growth can be substantial.
Mutual funds that focus on large, fast-growing companies that have high revenue growth earnings and do not pay dividends, but are making significant earnings are called 'growth funds'. Growth mutual fund managers will take risks and pay more for stocks in order to construct a portfolio of those companies that have above average earnings consistently and/or price appreciation. These funds can be and often times are more vulnerable to rises and falls than other mutual funds. When a market is on the downside, a manager must be aggressive to make up for the loss or a lot of money will go down the drain.
To understand mutual funds, one must look at them as a collection of stocks and bonds. They are similar to an organization that brings people together to invest in stocks and bonds and other securities. In turn, the investor owns shares representing a part of the holdings of the entire fund. They earn money in three ways: Dividends on stocks and bonds bring in interest. Fund owners receive distributions, which is income that the fund pays out over the course of a year. If the fund also sells securities that have increased in value and price, it has capital gain, and these gains are passed on to the investor via a distribution. If their price increases and are not sold by the executor of the funds, the fund's increase in price and shares can be sold for a profit. Investors can receive funds by check or can reinvest earnings into additional shares.
On the positive side the advantages of owning mutual funds are a professional, who purchases them for you and manages your portfolio, manages your money. It's a relatively inexpensive way for a smaller investor to manage his or her money through the help of a professional manager. Owning shares also allows investors to spread risks out over a large number of assets; thereby making the loss of any single investment less harmful. Buying mutual funds is less expensive transaction wise than a singular security transaction. You can convert mutual shares into cash whenever you like, and it's very easy to purchase them through a bank, with a minimum, small investment.
A major disadvantage is picking the wrong professional to manage your money. Whether you win or lose money through them, you still have to pay your manager, and that could hurt if you're in the red already. Another negative is having too much diversification because of investing in too many companies, or if the fund gets too large, it might be impossible for your manager to reinvest all the money it brings in. This is called dilution.
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