An Explanation of Mutual Funds for New Investors

By Stock Research Pro • April 24th, 2011

Many new investors need an explanation of mutual funds to help them differentiate investing in funds from other types of investments. A mutual fund is a company that collects money from many people for investment in stocks, bonds, or other types of assets. Each investor in the fund owns a portion of the funds’ holdings, known as shares. Mutual fund investors can make money in several different ways, including capital gains on securities, dividends paid on stock holdings, and the interest paid on bond holdings. Every mutual fund has a stated objective and therefore an appeal to a specific type of investor.



Types of Mutual Funds and their Investment Objectives

Some of the different types of mutual funds and their investment objectives include:

  • Value Funds- Mutual funds with a value objective investing in stocks that are perceived to be undervalued based on P/E, PEG and other valuation measures.

  • Growth Funds- Primarily seek stocks that are believed to offer opportunities for capital gains. The companies selected by growth fund managers are often small-cap companies that show good promise for the future.

  • Income Funds- Income funds invest in stocks that pay dividends and bonds that pay interest. Income funds are often seen as a good choice for conservative investors and investors who are retired or nearing retirement age.

  • Balanced Funds- Balanced fund portfolios are built with some combination of growth stocks, income stocks, and interest-paying bonds.

  • Index Funds- An index fund is a mutual fund that tracks the components of a given market index, such as the Dow Jones Industrial Average (DJIA) or the Stand & Poor’s 500 (S&P 500).


    • Load v. No-Load Mutual Funds

    Mutual funds make their money by charging fees to the fund investors. However, some mutual funds are more expensive than others for investors. Generally speaking, mutual funds are of two types, depending on how they charge their fees. A load mutual fund charges an initial sales fee plus and charges you for the shares or units you purchase. A no-load fund allows you to buy or redeem shares any time you choose without having to pay a sales charge.

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    The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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