A mutual fund is an “investment company, usually organized by an advisory firm, for the purpose of offering the fund’s shareholders a specific investment objective”. [1] Anyone purchasing these shares in the fund become part-owner, as well staunchly agrees with the funds specific investment objectives, thus the shareholder will want to partake in.
To manage the organization, shareholders elect a board of directors to organize the operations of the company as well the firm’s portfolio. It is sometimes assumed that the aforementioned advisory board is the owner of the fund, which is incorrect. The shareholders own the firm, and if necessary have the mutual power to elect a new investment advisor to take control of the funds activities.
There are six more common types of mutual funds; each will be described in greater detail below:
+Common Stock Funds
+Special Purpose Funds
+Income Funds
+Bond Funds
+Balanced Funds
+Money Market Funds
COMMON STOCK FUNDS
These funds invest most of their monies into common stocks (equities), although in most cases have varying objectives.
– Growth Funds: Seek capital appreciation by choosing organizations that are expected to grow more rapidly than the general economy of a given economy.
-Aggressive Growth Fund: Acquire shares in smaller growth companies for the end result equating to maximum capital appreciation.
-Growth and Income Funds: Seeking longer term capital appreciation with income included.
-Index Funds: Buying ideal stocks to simply match the indices of the marketplace.
SPECIAL PURPOSE FUNDS
Participating in such investments as, gold, energy, and or technology to satisfy certain shareholder investment interests. These funds have the option of using futures and options, and short-selling to meet more sought out, demanded objectives established by the funds shareholders.
INCOME FUNDS
These funds are portfolios that consist of common stocks, bonds, and preferred stocks. The managers of these types of funds often work hard to obtain ample interest and dividend payments for their shareholders.
BOND FUNDS
These founds seek out “high income and preservation of capital by investing primarily in bonds and selecting the proper mix between short-term, immediate-term, and long-term, bond maturities”. [2]
BALANCED FUNDS
These funds purchase both common stocks and bonds, under the assumption that conditions found to be unfavourable to common stocks are often at times favourable to bonds.
MONEY MARKET FUNDS
These funds provide their shareholders with the ability to participate in the short-run instruments of money markets, including treasury bills, and commercial paper. [3]
[1] Little, Jeffrey B. and Rhodes, Lucien. (2004). Understanding Wall Street. Fourth Edition. McGraw-Hill. (Pg.98)
[2] Ibid, (Pg, 100)
[3] Ibid