4 Types of Mutual Funds Explained: Handy Options for Passive Income
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There are 4 types of mutual funds. We all know that investing is important, and mutual funds are among the best investment options to supplement your regular income or grow your wealth over time.
Funds can vary, and each has its own set of risks and rewards. There are thousands of mutual funds, but most mutual funds fall into one of these categories.
Recommended reading: Top mutual funds in PH, mutual fund companies in PH
What are Mutual Funds?
A mutual fund is an investment that allows people to pool their money together and invest it in various securities, such as stocks, bonds, and other assets. It is managed by professional money managers in an investment company who try to maximize returns and minimize risk.
The Four Types of Mutual Funds
In general, there are four types of mutual funds that you can choose from to kick off your investment path.
Equity Funds
- Funds invested in stocks or bonds
- Over time, the fund usually goes up so it’s worth more than you first bought it
- Ideal for high-risk tolerance investors seeking capital growth
- Equity mutual funds are run by professional money managers who attempt to beat the market by picking stocks they believe will outperform the rest of the market.
Fixed Income Funds
- Invests in fixed-income securities like bonds
- Offers a steady income stream and capital appreciation for investors
- Less risk and less volatile than stocks
- These funds tend to be less volatile than stock funds, which means your investment is less likely to lose value.
Money Market Funds
- Funds that invest in short-term debt like bank loans, lease payments, etc.
- Very stable fund, since these funds are invested in high-quality debt
- Good choice for investors who want to avoid risk, park their cash, as well as a decent return
- These types of investments are considered to be extremely low-risk
Index Funds
- A type of fund that invests in a specific market index, such as S&P 500 or PSEI
- Index funds are passively managed, which means they are not actively managed by a portfolio manager
- A good way to invest in a group of stocks that represent the stock market as a whole
- Index funds can be a good choice for investors looking to generate passive income, as they offer diversification and low expenses.
What is a Mutual Fund?
A mutual fund is a financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets.
Managed by professional money managers, mutual funds aim to produce capital gains or income for the fund’s investors. The portfolio is structured and maintained to match the investment objectives stated in its prospectus.
Mutual fund companies offer individual investors access to diversified, professionally managed portfolios at a low price, which makes them an attractive option for those looking to invest without having to pick individual stocks or bonds themselves.
What is Passive Income?
Passive income is when you earn money without having to do any work. For example, if you own a rental property, you can earn passive income from the rent tenants pay. Another example is if you have a website and people buy products through it, you can earn passive income from the commissions.
Why Do People Buy Mutual Funds?
People buy these funds because they can pool their money together with other investors, spread the risk around, and invest in a group of stocks or bonds. Mutual funds allow diversification. It also reduces risk so that if one stock goes down, the others might go up.
Benefits and Risks of Mutual Funds
When investing in mutual funds, it’s essential to understand the potential risks and rewards. While it can offer various benefits, there are also some potential drawbacks.
Benefits
Two main advantages stand out: professional management and diversification.
Professional management can greatly benefit investors who don’t have the time or expertise to manage their portfolios. Mutual fund managers are experienced professionals responsible for making investment decisions and managing the fund’s day-to-day operations.
Another benefit of mutual funds is diversification. Investing in a fund can gain exposure to various asset classes and investments. Diversification helps reduce your overall risk by providing a cushion against losses in any area. Mutual funds typically are easy to buy and sell. You can purchase them through a financial professional or online broker. You can also sell your shares at any time by instructing your broker to do so.
Risks
Every potential investor should be aware of a few risks before deciding to invest their hard-earned money: market risk and fees.
The first risk is that these investments are subject to market risk, which means that the mutual fund’s value can go up or down in response to changes in the overall stock market. Even if you pick a fund with a good track record, there’s no guarantee that it will continue to perform well in the future.
Another risk is that fees and expenses can eat into your investment returns. Make sure you understand all the fees associated with a particular fund before you invest, as they can significantly impact your bottom line.
Frequently Asked Questions
What types of mutual funds are there?
The main types of mutual funds include equity funds (stocks), bond funds (fixed income), money market funds (short-term debt), and balanced/hybrid funds (mixed assets).
How are mutual funds priced?
Mutual funds are priced using their Net Asset Value (NAV), which is calculated by dividing the total value of all fund assets minus liabilities by the number of outstanding shares. The NAV is typically computed at the end of each trading day.
How are returns calculated for Mutual Funds?
Mutual fund returns come from a combination of NAV appreciation and any income distributions such as dividends or interest. Total return measures the overall gain or loss over a period, including reinvested distributions.
Are mutual funds a safe investment?
Mutual funds are diversified, which can reduce risk compared to holding a single security, but they are not risk-free. Safety depends on the fund’s asset mix, market conditions, and time horizon.
Can mutual fund shares be sold at any time?
Most open-ended mutual funds allow investors to redeem shares on any business day at the current NAV. Some funds may impose redemption fees or minimum holding periods.
Which mutual fund type charges the highest fees?
Actively managed equity funds often have the highest fees because of research and portfolio management costs. Specialized or niche funds can also be relatively expensive.
What mutual fund type has the investment objective of capital appreciation?
Equity or growth-oriented mutual funds primarily aim for capital appreciation. They invest mainly in stocks expected to increase in value over time.
Final Thoughts
There is no one-size-fits-all solution when it comes to investing in mutual funds. The key is finding the one that suits your individual needs and goals. Use these steps as a guide, and you’ll find the best investment for you.
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Where do I invest mutual funds in Philippines? Do you know some providers? Thanks
Some of the best mutual fund companies in the Philippines: Sun Life, ATR KimEng, PhilAm Fund.
I’ll write more about this, soon :)
As promised, here are the top mutual funds in the Philippines https://juaninvestor.com/mutual-fund-companies. Happy learning!