Mutual Funds Basics

What Are Mutual Funds?

If you are a novice in the world of investment then mutual funds just might your safest bet for getting involved in stocks and bonds.  Mutual funds are collective investments that are managed by a firm that specializes in collective investment.  Money is collected by the firm from many investors like you and then this communal money is used to buy stocks, bonds and other types of investments.  A fund manager is appointed by the firm to manage this money and to make decisions on where to invest and when to trade.  The gains and losses produced by these investments are then passed on to the individual investors.

Advantages To Investing In Mutual Funds

Mutual funds are an extremely easy way to invest your money since you do not have to decide which stocks or bonds to buy or religiously follow the market anticipating the right time to sell.  Your fund manager is employed solely for this purpose and decides everything for you.  Another great benefit of pooling your money together with that of other investors is that you can then buy stocks and bonds with lower trading costs than if you had bought on your own.  

Still, possibly the greatest advantage to purchasing mutual funds is diversification.  Diversification allows you to spread your money across many different types of investments.  Some mutual funds buy as many as hundreds, or even thousands, of stocks.  This means that although one of your investments may be down, another may be up.  This then reduces your overall risk and provides you will a greater chance of earning a profit.  

Research Your Way To Success

Before buying into mutual funds it is recommended that you research the fund's objectives.  You should also find out how the fund will attempt to reach its objectives and you should request a record of the fund's past performance and its fees.  Do not make the novice mistake of being wowed by a fund's recent success.  Instead, look at the fund's long term performance and its overall record, past and present.  It is also a good idea to research the reputation of the fund manager since he or she will be managing your money and making all of your investment decisions.  Contact the watch dog of mutual funds, the SEC (Securities and Exchange Commission), for information on mutual fund firms and fund managers.  By investing just a small amount of your time in investigating who you are giving your money to, you can help to ensure a successful and stress free investment.   

Article written by Nicole Sivan