Investing 101: Mutal Funds
Mutual funds can be another important part of your portfolio, but it helps to understand them first.
So What is a Mutual Fund?
A mutual fund is actually a collection of different stocks, bonds, and other types of securities (investments). The point of this is to lessen risk, while still reaping a decent reward. A mutual fund also pools many different investors’ money together to purchase these investments, with each investor getting part of the profits (or losses…)
What’s So Great About Mutual Funds?
The best thing about mutual funds is that your risk is spread among many different types of investments. If one company has a bad year, your investment won’t crash and burn. The other benefit for “normal” people is that the fund is managed by a professional so you don’t need to know the nitty gritty details of investing to start.
Mutual funds can also be an affordable way to start investing. Quite a few funds don’t have high minimum balances, so you can get started without a lot of money.
How Do Mutual Funds Make Me Money?
Similar to single shares of stock, you own shares of a mutual fund. You can usually sell these shares anytime you wish. Assuming you sell them for more than you bought them for, you make money.
Also similar to stocks, you can earn be paid dividends when the mutual fund performs well.
What’s Not So Great About Mutual Funds
Because mutual funds are managed by a professional advisor, there are fees and costs associated with buying into one. These fees are charged even if the fund doesn’t do well, so you might have to deal with a negative return along with a sales fee or purchase fee.
You have less control. With individual stocks and bonds, you can pick exactly what you want to invest in. So you aren’t likely to find a mutual fund with only the investments you want.
Overall
Mutual funds can definitely reduce some of the risks associated with investing. But you also have to deal with fees and a lack of control. From my own research and reading, I’m not too impressed with them since the fees seem to eat up a large portion of any return.
