Mutual funds may seem like a relatively new idea, but they were invented as far back as the 1920s in order to reduce the individual risks involved in navigating the stock market. Put simply, mutual funds are pooled funds from many investors that are professionally managed and invested in stocks, bonds, and other securities. The investments (known as the portfolio) are usually quite diverse and require a “funds manager” to track their progress.

How Do I Make Money?

When you invest in mutual funds you essentially become a shareholder in the mutual funds company, as do all of the other people in your investment group. When the investments yield profits, there will be dividends for each shareholder, but when there are losses your shares may go down in value.

Is It Risky?

There is always a risk involved when investing your money, but mutual funds are varied, which means your money is spread out over a number of different investments, so the risk of losing everything is minimal. It’s also comforting to know that the funds manager is paid based on how well those investments perform. You may feel confident in the knowledge that the person handling your money has a vested interest in it.

Are There Different Types Of Mutual Funds?

There are many different types of mutual funds, but only seven common ones, which are as follows:

• Money market funds
• Fixed income funds
• Equity funds
• Balanced funds
• Index funds
• Specialty funds
• Mortgage funds

Money Market Funds

Money market funds are short-term investments in things that almost guarantee a return, like government bonds and treasury bills. The money may accrue very fast, because the things you are investing in rarely, if ever, lose value. Basically, when you invest in these types of funds, you’re buying secured debt with high interest rates to get you a fast return.

Fixed Income Funds

Fixed income funds are those that pay a pretty stable rate of return. These can be things like bonds, corporate shares, and mortgages because they are all regularly paid into. Funds like this are perfect for those who want to see regular, reliable return on their investments because they rarely fluctuate.

Equity Funds

Equity funds are also known as “stock” funds because they focus on investing in a variety of stocks. Funds like this are meant for those who want to see their money grow fast, but don’t mind taking a little risk. Sometimes these types of funds become specialized, meaning they tend to focus on one specific sector, like healthcare or cosmetics.

Balanced Funds

These funds are exactly how they sound – balanced. Investors pool their money into a variety of stocks, fixed income, and money market funds in order to try and balance the wish for a fast return against the risk of losing money. People, who choose balanced funds are opting for a quick return as well as a stable, guaranteed one. Usually there exists both a minimum and a maximum amount to invest in these funds.

Index Funds

The NYSE (New York Stock Exchange) is an example of an index. Indices tell an investor about the price movements in all stocks commonly listed in a certain area or sector. So, when people invest in index funds, they are investing in a number of stocks that attempt to duplicate market averages. These funds are passively managed, meaning there is very little human monitoring of them. This can be a bonus because you end up paying less for a funds manager.

Specialty Funds

Specialty funds focus on specific areas of the world, or certain industries, to invest in. Often, these are emerging markets, so they may have high returns, but the risk tends to be greater.

Mortgage Funds

Mortgage rates may fluctuate, but they are rarely dissolved, so investing in mortgage funds makes sense for someone needing security. When you buy mortgage funds, you and your fellow investors are loaning out money for mortgages, which you will then gain back, plus interest.

How Do I Pick The Right One?

Analyze which type of mutual fund would be best for you, based on the amount of risk you feel you can weather and the amount of return you’re hoping to see. Talk to a mutual funds advisor and he or she will help determine the level of involvement you should assume.