Mutual Funds 101: Investing for Dummies
Mutual funds are
one of the most popular types of investments. Mutual funds are managed by
a company. They are a pool of money from multiple investors that is then used
to invest in various securities. Mutual fund investments can range from stocks and
bonds to more strategic investments such as short-term debts. Each person who
contributes to the mutual fund shares a portion of its ownership. In short, it
is a way of bringing a larger amount of money to an investment.Types of Mutual Funds
There are numerous
types of mutual funds available. The portfolio of the mutual fund is the
combination of shares owned by the fund. It can be made up of various types of
investments or a single type. This depends on the investment strategy in play.
Various options exist for investors including:
- Money market mutual funds: In these mutual funds, the investments generally are higher quality stocks and bonds with less risk. They are short term investments from federal, state, and local governments. There is less risk involved, and, as a result, less potential for high, dramatic earnings. Nevertheless, they tend to be more reliable.
- Stock mutual funds: These are investments in corporate stock ownership. There are various sub-options here including growth mutual funds, income funds, and index funds. Income funds pay regular dividends to the owners. Growth funds don't pay dividends as often, but tend to offer higher returns in the long term. Index funds tend to follow the Standard & Poor 500 Index and range widely as a result of changes in the marketplace.
- Target date mutual funds: This type of mutual fund offers a combination of stocks and bonds as well as other types of investments. These are particularly useful in retirement planning. Although they can start out more aggressive with higher risk, the risk level tends to change and fall over time, as you get closer to retirement.
- Bond mutual funds: These are a common type of
investment because they do carry a higher risk level than money market
funds, but tend to provide a higher level of gains to owners. There are
variations in the types and risk levels associated with these mutual
funds.
With so many
options, it can seem difficult to know which to choose. Generally speaking,
most people choose mutual funds because of the various benefits they offer that
can help to reduce some of these overwhelming decisions.
Key Advantages of Mutual Fund Investing
There are numerous
benefits to investing in mutual funds. They may not be the best outright
investment for some people, though. If you plan to invest money for retirement
and don't need an immediate return, this is likely the investment for you.
Other benefits include the following.
They Are
Professionally Managed
One if the best
reasons to turn to this type of fund is because they are professionally managed
by a licensed investor. This provides a key benefit to the investor because
there is a fund manager making decisions, handling the research into various
securities, and overall monitoring the losses and gains of the investment. As a
result, they can help to ensure performance on an ongoing basis.
They Allow for
Ample Diversification
One of the keys to
overcoming significant changes in market conditions is having an investment
that allows you to diversify, or place your money into various companies or
types of investments. This way, when one area drops in value, other areas may
pick up. Diversification like this is one of the benefits of mutual funds since
they allow you to invest in multiple stocks, bonds or other securities.
Overall Ease of Use
Mutual funds are
fairly liquid. This means that you can redeem their value just about any time
you need to do so. There are fees involved, but there is less restricted access
to your money. Additionally, you do not have to invest a lot of money to get
started. The initial investment amount differs based on the mutual fund and
managers, but these initial investments and further investments tend to be much
more affordable than other securities.
With mutual funds,
you'll likely see payments in dividends on an on-going basis. You'll also find
that buying and selling stocks is easier to do (someone else with ample
experience can do this for you). And, you'll find that mutual funds are
relatively safe investments for short and long term investing depending on the
portfolio selected. These benefits are some of the reasons behind while mutual
funds are so commonly used and so well respected for most investors today.
