Mutual Funds Explained

Deciding where to invest your hard earned money can be a challenge. With so many options available it can be tough to decide what type of investment account(s) is right for you. One option you will highly want to consider is a mutual fund. Mutual funds are a great way to invest your money into a diverse portfolio. Here is a look at what a mutual fund is, how they work and what the advantages of investing in one are.

What Is A Mutual Fund

When you invest into a mutual fund you are investing your money into an account where money managers of the account combine your cash with thousands of other small investor’s in order to create a diversified portfolio. When you invest your money into the mutual fund you receive a certain number of shares of the fund you have contributed to. The fund manager is then responsible for taking the pooled money that has been deposited into fund and invests it in a variety of stocks and bonds. You then will receive a cut of the return based on the percentage of shares that you own.

There are numerous advantages of investing into a mutual fund including the following:

  • Investing into mutual funds does not require a large upfront investment. For as little as about $1000.00, or even less in some cases, you can get started at investing into a mutual fund.
  • Mutual funds offer buyers a diversified portfolio.
  • Mutual funds offer the convenience of being able to easily invest your money without a lot of work on your part. It is much more complicated to invest you money individually into stocks and bonds.
  • Mutual funds are easy to manage in that you as an investor do not need to take the time to research every stock and bond that your money is going into. Professional account managers who are educated and skilled carefully select where funds will be invested.
  • Mutual funds are easy to buy. You can easily purchase mutual funds through a broker or on your own.
  • Mutual funds are easier to liquidate than other investment options. Most mutual funds offer a daily payout option. In other words, when you are ready to cash in your fund you can do so without having to worry about finding a buyer like you would if you owned individual stocks, for example.

There are some disadvantages that you will want to consider as well:

  • You do not have control of exactly where your money is going. If you are someone who always has to be in control a mutual fund may not be a good option for you. Your return is based on the mutual fund manager’s choices and not your own.
  • The cost of owning a mutual fund can also be higher than other investment options. Sales commissions can be high and you will want to be aware of what fees you will be paying before you invest.
  • Just like every other investment that you make, there are no guarantees that you will actually see a positive return.

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