{"id":175553,"date":"2020-09-01T17:40:00","date_gmt":"2020-09-01T21:40:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/trading-lessons\/types-of-mutual-funds-and-considerations\/"},"modified":"2023-04-25T20:56:04","modified_gmt":"2023-04-26T00:56:04","slug":"types-of-mutual-funds-and-considerations","status":"publish","type":"trading-lessons","link":"https:\/\/www.interactivebrokers.com\/campus\/trading-lessons\/types-of-mutual-funds-and-considerations\/","title":{"rendered":"Introduction to Mutual Funds"},"content":{"rendered":"

Introduction to Mutual Funds<\/h3>\n

In the introductory lesson, we explain the basics of mutual funds, starting with what a mutual
\nfund is and how securities make up a fund\u2019s portfolio. This lesson explains that a mutual fund is
\nan investment that combines your money with money from other investors and that the combined pool of money is used to buy shares in securities such as stocks and bonds.<\/p>\n

Each share in the mutual fund represents an investor\u2019s part ownership in the fund. Every shareholder may gain profits and incur losses in equal portion.<\/p>\n

Let\u2019s start with the what types of Mutual Funds are available.<\/p>\n

EQUITY FUNDS<\/strong> invest in stocks. When you own stock, you own part of a company.
\nFIXED INCOME<\/strong> funds buy investments that pay a fixed rate of return, such as municipal bonds, mortgage-backed bonds, and corporate bonds.
\nMONEY MARKET<\/strong> funds invest in short-term fixed income securities, such as U.S. Treasury bills, certificates of deposit, bankers\u2019 acceptances and commercial paper.
\nBALANCED<\/strong> funds invest in a mix of equity and fixed income securities.
\nINDEX<\/strong> funds aim to track the performance of a specific index, such as the S&P 500.
\nSPECIALTY<\/strong> funds can focus on sectors, such as real estate or technology or healthcare, or they can have a specific mission, such as socially responsible investing.
\nFUND of FUNDS<\/strong> are mutual funds that invest in other funds.<\/p>\n

Mutual funds can be actively or passively managed.<\/h4>\n

Active management<\/strong> – With an actively managed mutual fund, the Portfolio Manager buys and sells securities, and attempts to outperform the return of the overall market or other benchmarks. A benchmark is a standard against which the performance of a security, mutual fund or\u202finvestment\u202fmanager can be measured.<\/p>\n

Passive management<\/strong> – Passive management involves buying a portfolio of securities designed to track the performance of a benchmark\u2019s index. The mutual fund\u2019s holdings are only adjusted if there is an adjustment in the
\ncomponents of the index.<\/p>\n

Open-End versus Closed-End Mutual Funds<\/h4>\n

There are 2 categories of mutual funds \u2013 open-end funds and closed-end funds.<\/p>\n

Open-end funds<\/strong> have an unlimited number of shares and are priced at the end of each trading day.<\/p>\n

Closed-end funds<\/strong> have a set number of shares whose price may fluctuate throughout the trading day. To invest in a closed-end fund, there must be shares available and you must buy an existing share. These funds trade like equities.<\/p>\n

In this lesson, we also cover what people should consider prior to investing in mutual funds.<\/p>\n

Potential Benefits:<\/h4>\n

Diversification<\/strong> – Mutual fund investors get broader diversification, as one fund share may comprise dozens of underlying stocks and\/or bonds.
\nProfessional oversight<\/strong> – A mutual fund is generally overseen by a Portfolio Manager who has expertise in investment selection. The Portfolio Manager may also have a research team to assist him\/her.
\nManaged for you<\/strong> – Investors do not have to pick securities and manage investments themselves.
\nLow minimum investments<\/strong> – Most mutual funds have low minimums, so people can start investing in mutual funds
\nwith a very small initial investment.<\/p>\n

Before Investing in mutual funds, you should consider if they are an appropriate investment for
\nyour personal financial situation.<\/p>\n

It\u2019s important to consider what your goals are. For example, are you investing to:<\/p>\n