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What Are Mutual Funds?
The Definition of Mutual Funds
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Mutual Fund Investing For Dummies ... And Everyone Else
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The Various Types of Mutual Funds
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What Are Mutual Funds?
...and other Frequently Asked Questions about them.
What are mutual funds? Why should I invest in them? Are mutual funds safe? How much money can I earn? How do mutual funds compare to other investments?
I'm sure you have plenty of questions about investing in mutual funds. This article aims to answer all of those questions and help you learn more about what mutual funds are.
Why Should I Invest In Mutual Funds?
A mutual fund can do most of your investing for you. Are you comfortable buying stocks or bonds on your own? Would you be comfortable if you invested on your own and made a mistake? If not, mutual funds can make investing easier for you.
It should be no surprise, then, that many people learn to invest by starting with mutual funds.
Most fund companies are very convenient to do business with. You can usually open a mutual fund account with as little as $100. You can usually put your money in and take your money out when you need it. If you ever have questions about your mutual fund, your investment company can answer them for you. That can give you peace of mind.
Mutual funds can also save you money. Rather than paying fees whenever you trade, your trading costs are included in your mutual fund's performance. Mutual funds can negotiate low trading costs with brokerage companies. Those savings are then passed on to you as an investor.
Most importantly, mutual funds give you more flexibility with your money. You can choose between ownership investments or lending investments. There are many different types of mutual funds you can invest in, each with its own style and strategy.
- Do you want to invest in a foreign country?
- Would you like to focus on a specific industry?
- How about investing into small-sized or large-sized businesses?
You can do all of those things with mutual funds.
How Much Money Can I Earn?
Mutual funds have great earning potential. When you invest in a mutual fund, you are entitled to earn income on your fund's investments. The more time and money that you invest in your mutual funds, the more you can earn. Most people invest in mutual funds because of the opportunity to earn extra income.
Extra income can help you improve and enrich your life. Investing is not about making money, it's about what you do with that money. For example: you could pay for college, start a business, buy a home, or retire with confidence. I'm sure you have important financial goals that you want to achieve in your life. When used properly, mutual funds can help you accomplish any of those financial goals.
Some mutual funds earn more than others. There are thousands of mutual funds to invest in, each with different returns and risks. Your returns will depend on the amount of money you invest and how much risk you take on. That brings me to the next question...
Are Mutual Funds Safe?
Like any investment, mutual funds carry some risks. When you invest in a mutual fund, your investment is not guaranteed by the FDIC or any other government agency (SEC.gov). That means it is possible to lose money.
However, mutual funds also make it easier for you to manage those investment risks. Every mutual fund is regulated and limited to the amount of risks it can take on. Independant companies measure the risks and performance of mutual funds. You can use those statistics to measure risks and find out which funds are right for you.
Mutual funds are designed for low risk from the beginning. A mutual fund spreads your money out across a group of investments. Built-in diversification is a major benefit for mutual fund investors. If one of the investments in your mutual fund fails, it will make a smaller impact on your finances. That means a mutual fund carries less market risk than an individual stock or bond.
Most Americans trust mutual funds to manage their wealth. More than 50 million U.S. households own mutual funds. That's a lot of people. At the end of 2008, mutual funds managed $9.6 Trillion dollars for those investors (ICI.org). That's a lot of money. Since so many people trust so much of their money to mutual funds, they are definitely worth considering as an investment.
How Do Mutual Funds Compare to Other Investments?
I've explained what mutual funds are, but how do they stack up against other investments?
Here is a comparison of mutual funds versus other investments, to give you a better idea of how mutual funds work:
- Individual stocks and bonds are closely related to mutual funds. In fact, they are the foundation of the mutual fund. You probably know that you can invest in stocks or bonds outside of a mutual fund. Stocks and bonds have powerful earning potential, but their risks and returns vary depending on the individual investment. On their own, stocks and bonds require more attention than mutual funds. This is because of their higher risk compared to mutual funds.
- Bank CD's (certificates of deposit) and money market accounts both provide income to investors, like mutual funds. These types of short-term investment accounts are actually bank deposits. That means the value is guaranteed by the FDIC (unlike mutual funds) and the government. These accounts usually earn lower returns than mutual funds, but more than a checking or savings account. Mutual funds are different from these accounts because they are designed as long-term investments.
- Hedge funds may seem similar to mutual funds, but there are important differences. Hedge funds are unregistered and unregulated investments. You may not always know exactly what you are investing in with a hedge fund. There are no limits to the amount of risks that a hedge fund can take; many of them take on significant risks in trying to earn profits. Not everyone can invest in a hedge fund; they offer their funds only to high income clients or those with large sums of money.
Each type of investment is a little bit different, so it's up to you to decide which ones work for you and which do not. An investment plan can help you make the right choice.
If you need guidance how to put together your own investment plan, I suggest reading The Beginners Guide To Investing.
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