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Mutual Funds - Essay Example
Author : wisozkmaci
Finance & Accounting
Pages 5 (1255 words)
With the increasing risk of the financial markets brought on by the American recession and the European Sovereign Debt Crisis investors have increasingly looked to safe havens for their money. …
Mutual funds are securities that are registered with the Securities and Exchange Commission (SEC). Broadly speaking, they are composed of stocks, bonds, short-term money market instruments, and other securities that function as a means of hedging against possible declines in a security or investment sector. The main understanding is that this diversified approach will provide the investor an option that protects them against market fluctuations, as when one security drops in value, another will increase. A manager or board of directors oversees these funds. The board hires a fund manager and works to ensure that the mutual fund is managed in the intended interest of the shareholders. This essay examines the advantages, disadvantages, and different types of mutual funds. Advantages There are a great variety of advantages to investing in mutual funds. One of the most prominent such aspects is the increased amount of diversification. In terms of portfolio theory, diversification constitutes perhaps the most overarching concept. Essentially diversification is the gathering together of diverse investment securities as a means of guarding against the failure of one specific sector. While it is possible for investors to diversify their portfolio through a widespread purchase of stocks, such a process is both extensive and also contains liquidity issues. ...