|
Mutual Funds 101: What Are Mutual Funds and How Do They Work?
What is a mutual fund? It is a company that pools money from many investors and invests it in a variety of options including stocks, bonds, short-term money markets and other securities.
With fewer and fewer employers offering pensions and other retirement savings options, more and more American workers are turning to Mutual Funds to save for the future. |
What is a mutual fund? It is a company that pools money from many investors and invests it in a variety of options including stocks, bonds, short-term money markets and other securities. The fund's portfolio (or listing of its investment funds), shows how diversified its investments are. These funds are handled by a professional money manager as one account. Individual investors have little (if any) say as to the types of assets purchased for the fund's portfolio.
Letting someone else handle all trades can be difficult for many seasoned investors to handle, but most uneducated investors love the idea of giving a team of professionals sole buying power. The advantage of being involved in a large-scale mutual fund is the ability to diversify their holdings - a safer investment for all.
There are some disadvantages though to this type of account. They include:
·Cost. Investors are required to pay sales charges, annual fees and other expenses on mutual funds regardless of how well (or poorly) the fund performs.
·Price Uncertainty. When you purchase an individual stock you can check to see how well it's doing as many times a day as you wish. This is not the case with mutual funds, which are only required to calculate their NAV once every 24 hours.
There are three main types of mutual fund categories - money market funds, bond or fixed income funds, and stock (equity) funds. Each offers its own risks and rewards.
Money Markets
Relatively low-risk, money market funds are, by law, only allowed to invest in high-quality short-term investments issued by the U.S. government. Inflation can be a concern, however, since rising inflation rates can quickly erode money market investment returns.
Bond Funds
Bond funds generally produce higher yields, thus contain more risk.
Stock Funds
The best option for long-term investing, stock funds are extremely volatile on short term basis with drastic ups and downs depending on market trends.
Mutual funds are a growing investment strategy for many small scale investors saving for their retirement. The key is to find a fund that offers a diversified portfolio that offers a comfortable risk level for your investment style.
|
