Mutual Funds Explained
March 9th, 2009. Published under Mutual Funds. No Comments.
If you have ever set up a retirement account such as a 401K or if you have every picked up a money management magazine, you have probably heard of a mutual fund. If you don’t know much more about it other than that it is an investment, you are not alone. Many people are in the dark when it comes to investments, and a mutual fund is neither a stock nor a bond, the two most common investments.
Mutual funds are actually not complicated investments. Some investments such as derivatives and commodities can be very complicated, but mutual funds are actually supposed to make investing much easier. If you want to invest your money but you don’t have the time or the skills to choose stocks and bonds, you should try mutual funds.
A mutual fund is simply a mix of many different stocks and/or bonds. This is how they work in layman’s terms: First, a bunch of people who are interested in investing pool in a bunch of their money. This money is given to the fund manager.
The fund manager uses this money to invest in different stocks, bonds, or other investments, depending on the type of fund. The whole portfolio is divided into shares which is used to keep track of what you own in it.
As time goes on, you can continue to buy more and more shares of the mutual fund. As the stocks and bonds in the portfolio go up, so does the value of your investment. If they go down, so does the value of your investment.
In a good economy, ideally the value of your mutual fund shares should be increasing. With mutual funds you get an automatically diversified portfolio. Diversification is when you are invested in many different industries and companies and this reduces your risk.
Because mutual funds are already diversified, they are great for new investors or for those who have no desire to choose their own stocks and build their own diversified portfolio.
If you want to start investing, and you should be preparing for retirement, try starting with mutual funds. A good mutual fund can help increase your wealth and financial security.