Mutual funds have traditionally been one of the most popular investment options available. They are accessible to all types of investors and have benefits not normally available to smaller personal investors. If you think mutual funds are for you, read on to learn more.
What Are Mutual Funds?
Mutual funds are companies that leverage the money from many different people to make large investments. They're powerful because they have more money to spend than any single investor in the fund does. Mutual funds can contain any combinations of investments from bonds and stocks to real assets. The collection of all investments in a mutual fund is called the portfolio. The portfolio is normally managed and changed by financial experts who run or work for the fund.
Benefits
One of the main benefits of mutual funds is that they are managed by professionals. The fund can change in response to the markets or economy. Another benefit is that you are usually buying shares in a balanced and diversified portfolio. This helps to minimize your risk of losing a large amount of money if a single investment or market sector does poorly. A third benefit is that you can buy into a mutual fund for very little money in most cases. A final benefit is liquidity. This means you can sell your shares and get your money back quickly instead of having to wait for months or years.
Drawbacks
Fees are a disadvantage of mutual funds. You have to pay feels on all earnings to support the management. Some fees are due even if the mutual fund suffers losses. A second potential drawback is that you cannot control what is in the fund. The composition of the portfolio is up to the fund managers. There will be times when you cannot even tell what is in the portfolio. This can be disconcerting if the portfolio starts to perform poorly. A final drawback is that mutual funds are not federally insured. You can lose money if something catastrophic happens to the fund.
How Does Investing Work?
You buy shares in mutual funds just like with any other company. Each of your shares entitles you to a defined portion of the earnings of the fund. You can buy shares through the fund itself or through other sources like banks and brokers. You receive yearly shareholder reports and other updates showing the performance of the fund. You might receive payments, also called dividends, on a regular basis if the fund performs well. You are allowed to sell your shares in the fund at any time, for any reason.
Choose Your Fund
Start by requesting a document called the prospectus. Every mutual fund must legally offer this document. It lists the risks, assets, goals, and other information about the fund. Be sure to look closely at the fees you will need to pay. High fees mean lower returns. Check that the goals and strategies of the mutual fund match your own financial goals. Try to determine the risk of the mutual fund by looking at past performance, assets, earnings, and the amount of cash reserves on hand. The best mutual funds have diverse portfolios. Avoid funds that focus solely on just one specific type of investment. Finally, look at recent earnings to see whether the fund has been profitable.
