People dream of financial freedom. To capitalize on this dream, financial institutions created investment opportunities to help people create wealth conveniently over a period of time by putting money into different investments. Over the years, a lot of successful investors benefited from the profitability of various securities such as bonds, stocks, trusts, CDs, money market instruments, variable universal life insurance and even real estate.

However, a lot of these investments, such as stocks, are very volatile, as they correspond to the profit and loss of corporations. Individually partaking of these forms of investments also requires one’s close attention to market fluctuations, which necessitates one to have the stomach and financial fortitude to take the significant ups and downs of the market.

Fortunately, the mutual fund was invented for those who do not possess the ‘virility’ of the more audacious stock market trader. As they say, the mutual fund was created for the little guy who wanted to get a piece of the action. But what is a mutual fund? How does it help the investor accumulate wealth overtime?

A Primer on Mutual Funds

A mutual fund is a professionally managed investment instrument that pools money from a number of individual and corporate investors. The fund manager then invests the pooled money into various securities such as bonds, stocks, money market instruments, real estate and even in precious metals such as gold.

Mutual funds started in the 1940s, after stronger regulation of the stock market was instituted by the Securities and Exchange Commission due to the financial disaster that resulted from the stock market crash of 1929.

A mutual fund is no more than a share or a stock of a mutual fund company. What’s great about a mutual fund is that it is professionally managed by a qualified fund manager, giving the individual investor peace of mind as he doesn’t need to keep a close eye on his investments on Wall Street Journal. The fund manager pools the money from a number of individual and corporate investors and invests the money into different investment instruments. This way, the gains or losses are evenly distributed to the investors so that no matter how big or small each investor put in to the fund all investors get the same yield or loss. To illustrate, let’s say four investors invested in ABC Mutual Fund. John invested $1,000, George invested $1,500, Shane put in $2,500 and St. Mark’s Hospital threw in $10,000. Over a period of 12 months, the ABC Mutual Fund yielded 20%, giving John’s original investment an additional $200, George’s an additional $300, Shane’s an additional $500 and St. Mark’s Hospital’s an additional $2,000. All four investors got the same yield based on the percentage that they invested in the same mutual fund.

Types of Mutual Funds

Monies invested in a mutual fund are placed in different types of funds. Typically, a mutual fund is invested in stocks, bonds, money market funds and in a balanced investment composed of some stocks and bonds.

Mutual funds invested in stocks or equity funds are seen as the most volatile but offers potentially huge gains. The objective here is to create long-term growth for the investors’ investments.

Bond funds, or mutual funds invested in bonds, offer some greater security as bonds do not usually fluctuate relative to the movement of the market. Most often, bond funds offer a fixed rate of return, making it ideal for people who are looking into receiving fixed income from their funds.
Balanced funds, or mutual funds invested in a mixture of stocks and bonds, give investors the best of both worlds: The potential to earn huge ROI over a long period of time, and the opportunity to accumulate fixed income periodically.

Mutual funds offer a great opportunity for anyone looking to accumulate wealth for retirement, for a dream vacation one is looking forward to taking in five years or simply to finance the dream lifestyle one is striving to live.