Mutual funds are often discussed as wise ways to invest. For those who are new to investing or are cautious investors, mutual funds can be an excellent tool for investing. Why buy mutual funds? Because they are diversified investments by design, and are managed professionally, your risks are minimized.
While you may not get to invest in the flavor of the month with a mutual fund, you also don't have to worry about your hot stock suddenly going cold, either. So what are mutual funds?
Mutual funds consist of a group of investors pooling together funds to invest in a package of several types of investments. This often includes stocks, which are shares in a company, bonds or money market accounts. With bonds you help a company or government entity pay for expenses or cover debts. Money market accounts are in some ways similar to savings accounts.
Mutual Funds Diversify
When you use several types of investments, this is called diversifying your portfolio. When you ask “why buy mutual funds?” smart investors will explain that diversifying your portfolio is made easier with a mutual fund.
When you buy into a mutual fund, your investment is managed by a professional investment manager, who is not only highly trained in how the markets work, but represents your interests and the interests of the other investors. He or she may offer a variety of investment tools and services. But if you ask him or her, “why buy mutual funds?” you should get an answer that reflects deep knowledge of the various types of investments.
They should also disclose any fees that you may incur for joining the mutual fund, known as a “load fee”. These load fees can be incurred when you join, or when you leave the fund to invest elsewhere. You should also learn about any restrictions there may be on when and how you can sell your shares, should you decide on a different investment strategy. And of course, you aren't restricted to investing just within the mutual fund; it can be part of a larger portfolio with other investments.
Why You Buy
Not all mutual funds are alike; some specialize in packages offering a variety of stock investments, others offer mainly bonds, and some combine stocks, bonds, and perhaps a money market account. While diversification is a wise form of investment, you won't get rich overnight. Rates of return are lower with low-risk investment strategies.
Why buy mutual funds? Because they are a very easy investing instrument to diversify your investment over a large and varied set of assets. For all of us who are not the best stock pickers in the world, that is a very attractive proposition. Please share this blog post via Twitter, Facebook and Google+.