As the financial market has continued to grow and evolve over time, so too have the range of options and investment vehicles available to traders. Take mutual funds, for example, which are typically overseen by skilled fund managers and can incorporate a range of securities from stocks and bonds to money markets and other financial instruments.
We’ll explore the concept of mutual funds below while asking whether this is actually a safe way to invest in the modern age?
What is a Mutual Fund?
In simple terms, a mutual fund is a type of financial vehicle that comprises a pool of money collected from multiple investors.
This capital is then distributed by money and fund managers across an array of assets, most commonly stocks and fixed-income products such as bonds and money market instruments.
There are numerous types of mutual funds available to investors, the most commonplace of which include:
- Equity Funds: This is the largest category of mutual funds, and as the name suggests it deals principally in stocks. There are numerous sub-categories within this definition, of course, including the size of the company that they invest in (small, mid, and large-cap) and their wider investment approach. Some may even be categorized by their country of origin, whether they’re domestic in nature or located overseas.
- Fixed-Income Funds: Fixed-income funds are noticeably lower risk than equity alternatives, as they focus on assets that pay a set rate of return such as governmental or corporate bonds (or other secure debt instruments). The idea with this type of fund is that the portfolio included within generates interest income, which is then distributed to shareholders.
- Index Funds: While Index funds may claim a smaller share of the marketplace, they’ve begun increasingly popular over the course of the last few years. This is built on the premise that it’s incredibly hard to beat the market consistently, so index fund managers instead buy stocks that correspond with a major market index such as the S&P 500. This type of investment is built on intense research and market analysis, and it can also be incredibly rewarding over time.
Why a Mutual Fund is a Safe Investment Option
Not only are mutual funds safe from a fundamental perspective, but they also offer some additional advantages for traders.
For example, all mutual fund providers in the UK are fully licensed and regulated by the Financial Conduct Authority (FCA), while everyone appointed as a money manager must boast the correct qualifications.
Additionally, mutual funds are thought to be more tax-efficient than traditional investments, while this is augmented by inflation-beating asset classes that typically lead to significantly higher returns over time.
What’s more, you can also target the different types of mutual funds to tailor your risk-reward profile accordingly, with those focused on fixed-income products thought to be amongst the safest and capable of delivering sustainable returns over time.