What comes to mind first when you hear mutual funds? For me, it’s “interest on money.” Let me explain: I love finding new and easy ways to make extra money. A comfortable, low-effort approach to let your money work for you. That is what we now refer to as “investment.”
Investing is not a one-way street; it has multiple parts. Stocks, bonds, exchange-traded funds, certificates of deposit, options mutual funds, and a slew of other alternatives are available forms of investing. However, in this article, we will focus on one aspect of it, which is mutual funds.
What are mutual funds?
Mutual funds pool money from various investors and invest it in a diverse portfolio of securities, bonds, money market instruments, and other assets. If you’re still not sure what I’m talking about, let me explain with a simple illustration.
How does mutual funds work?
Remember the first time you went clubbing with your friends and the drinks bill was up to 150k? Then, in order to afford the drink, you had to share a part of the funds with everyone else. Or that time when you ordered a buffet meal at a high-end restaurant with friends and had to split the bill with them.
All of these purchases were made possible thanks to the contributions of everyone else, which allowed you to afford the meal or drink. You might not have been able to afford it if it had been left to you.
That’s how mutual funds work too, but with a twist. Mutual funds allow you to pool your funds together with others in safe, high-yielding securities.
Imagine it as a form of crowdfunding. That allows everyone to get a drink or a meal without having to pay the full amount. In essence, mutual funds are large investments broken down into smaller units that anyone may purchase and share in the profits.
With mutual funds, you can invest in your favorite high-yielding securities regardless of the amount; with Zimvest, you can actually start investing with as little as $10.
Types of Mutual Funds
Mutual funds come in a variety of types, just like the drinks you can have at the club or the meals you can choose at the buffet lunch. The type you choose depends on your risk appetite and investment tastes.
Here are the types of mutual funds below:
Equity funds are also known as stocks. It simply refers to a fund manager pooling funds from different investors and investing them in the stock of a few companies. He diversifies the investments by investing in companies from various industries and market capitalizations.
Also, investing in equity funds is typically easier and less expensive than purchasing each individual stock in a fund’s portfolio.
Investing in balanced funds is to have the best of both worlds. It is a hybrid investment type that allows you to invest in the money market and equity funds. These mutual funds are designed to balance investments in a composed ratio, thereby minimizing an investor’s risk exposure.
Fixed Income Funds:
Fixed income funds are sometimes called bond funds. The interests of this investment type are usually fixed and paid after the maturity date.
Ever heard of short-term debt investments? Treasury bills, certificates of deposit, commercial paper, federal funds, bills of exchange, and short-term mortgage-backed securities and asset-backed securities are some of the products traded in the money market.
How To Start Investing in Mutual Funds
It’s easy to get started. What influences which mutual funds you invest in is your preference. Some people would order rum or a jollof rice platter, while others would prefer a cocktail or a shrimp-fried rice platter. It depends on what your taste buds crave, the same goes for mutual funds too, which depends on your investment taste and risk tolerance.
Investors can be categorized into three types:
You are wary of high-risk investments as a low-risk investor. You’d rather make a small profit than lose your money. As a result, you are extremely cautious about the investments you make. Such investors are more likely to put their money in the money market.
Medium Risk Investor:
In this category, you are willing to take on more risk than a low-risk investor. Fixed income funds are an excellent choice for this type of investor.
These investors are more daring and willing to risk their money in exchange for a higher return. They are less worried about market volatility and prefer to invest in the stock and equity markets.
The best thing about mutual funds is that they allow you to access a large, broad portfolio without having to worry about market fluctuations. And they are fund managers who are experts in the field of investing and are dedicated to making investments on your behalf.
Start your journey to financial freedom, Join Zimvest here