If you are looking to invest in mutual funds, this article will help you understand what they are, how they work, and the benefits you earn from investing in them.
[size=14]What are mutual funds?
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A mutual fund gathers money from multiple investors to invest in financial instruments such as stocks, shares, treasury bills, government bonds, etc. Mutual funds are beneficial to investors who do not have the required minimum capital to invest in some of these instruments. Mutual funds reduce the risk to investors because they consist of different investments.
What are the types of mutual funds?
In general, there are four broad types of mutual funds:
Money market mutual funds
These funds invest in short term fixed-income assets like government bonds, treasury bills, etc. They are relatively less risky compared to the other mutual funds and offer the lowest returns.
Equity mutual funds
These funds are also known as stock funds. Equity funds invest in stocks of publicly traded entities and it makes the fund the most volatile, compared to the rest. They offer the highest returns because of the high risk involved.
Fixed income funds
Also known as bond funds, these funds invest in corporate and government debt intending to pay a fixed income to investors. Bond funds have higher returns than money market mutual funds but not as high as stock funds.
Balanced funds
These funds invest in a combination of stocks and fixed income instruments. It is a diversified portfolio with high returns and lower risk. Balanced funds typically consist of 60% bonds and 40% stocks. www.overwood.ng is an example of a safe high yield mutual fund in Nigeria that offers compound interest rates of up to 15% annually.
How do mutual funds pay?
The two ways to make money on a mutual fund include:
Distributions: Depending on the type of mutual fund you invest in, you could get the distribution of dividends, interests, or other income the fund receives.
Capital gains: You could make money from selling the mutual fund for more than you initially paid for it.
What are the benefits of mutual funds?
1. Mutual funds help investors diversify their investments due to the different types of instruments they invest in. A diversified portfolio leads to lower risks of investments.
2. Professional fund managers are in charge of mutual funds. This means investors do not have to actively monitor their funds and they can trust the professionals to invest in the right mix.
3. Mutual funds are very affordable, there are some online platforms in Nigeria that allow you to start with a minimum of ₦100.
Mutual funds are perfect for long term investments and growing your wealth.
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