Stocks and Mutual Funds - Mutual Fund Benefits and Types
Mutual Fund Benefits
Mutual funds offer the following advantages to investors:
- Diversification - investing in mutual funds reduces risk in a portfolio, since the investor is able to own a proportional share of the many securities in each fund.
- Professional management - each mutual fund has a full-time portfolio manager, who can devote more time than most investors in deciding what securities to buy and when to sell.
- Liquidity - mutual fund shares can be sold at any time, and proceeds are usually received within a week or less.
- Flow-through of dividends and capital gains and losses - a mutual fund that distributes at least 90% of net investment income is treated as a conduit - meaning that the mutual fund itself is not taxed, and the investors report the dividends and capital gains on their personal returns. If the fund distributes at least 97% of dividends and 98% of capital gains to investors, it is not subject to tax surcharges, so this higher amount is almost always distributed.
|Exam Tips and Tricks
Most of the questions on the exam are concerned with open-end management companies or mutual funds.
Mutual Fund Types
Although many people think mutual funds are always composed of common stocks, the fact is that a mutual fund can be made up of any traded securities that suit the fund's objectives. Here are some examples of different types of mutual funds:
- Stock funds - growth, value, large-cap stock, small-cap stock, international stock, sector funds
- Bond funds - corporate, government, municipal, convertible
- Money market funds - general, government, municipal
- Balanced funds - a mix of stocks and bonds, sometimes known as asset allocation funds
- Real estate funds - invest in a mix of real estate investment trusts (REITs), giving smaller investors a chance to gain exposure to the real estate sector in small amounts without high transaction costs.
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