Major Benefits of Mutual Funds

Mutual funds are the primary means by which most investors in the United States purchase securities, especially in the stock markets. Whether novice or experienced, young or not-so-young, most individuals are attracted to these funds for four major reasons: diversification, convenience, professional management, and lower transaction costs.

The Basics of Mutual Funds

Each mutual fund is legally registered as a separate management company or trust with the Securities and Exchange Commission (SEC). The entity that creates the fund is called its sponsor. It invests its own money to start the fund's portfolio and also initially selects the fund's portfolio manager. The sponsor then markets the fund to the public to bring additional money into the pool.

Types of Mutual Funds

There are basically three broad categories of mutual funds: those whose goal is to provide immediate income, those oriented toward long-term growth or capital appreciation, and those offering both. The individual fund's objective will be stated at the beginning of its prospectus.

Definition of Money Market Accounts and Mutual Funds

Money market accounts (MMAs) are bank savings accounts that generally pay a higher rate of return than regular savings accounts. They're insured by the Federal Deposit Insurance Corporation (FDIC) for up to $100,000 ($200,000 for joint accounts) per financial institution. In exchange for the higher interest rate, you have somewhat limited access to your money with this type of account.

Mutual Funds 101

A mutual fund is a single portfolio of stocks, bonds, and/or cash that is managed by an investment company on behalf of many investors. Every mutual fund has a manager, also known as an investment adviser, who directs the fund's investments according to the fund's objective.

Types of Money Market Accounts and Mutual Funds

There are two general types of money market funds: taxable and tax-free. In a taxable money fund, any income that you earn is subject to federal, state and local taxation. Income from a tax-free fund is exempt from federal taxes, and may also be exempt from state and local taxation as well.