Why It is Beneficial To Invest In Mutual Funds

Reviewed: July 12, 2014
By FinanceWeb

One of the best ways of managing investment risk is diversification. Most of people don’t have enough cash to create an adequately diversified portfolio of individual stocks and bonds. However, you will be able to gain an instantly diversified portfolio by investing in a mutual fund. You will have access to thousands of funds, but not all of them will match your investment goals. It is important to do some research to find the ones that meet your investment needs.

Mutual Funds Explained

A mutual fund is a firm that pools investors’ cash to make many types of investments. Money market, stocks and bonds are some of the investments that may comprise of a mutual fund. Mutual funds are managed by an investment manager who purchases and sells securities to achieve the most effective result or growth of the fund. When you invest in a mutual fund, you are a shareholder in the mutual fund company. You will earn dividends when there are profits, and your shares will reduce in value when there are losses.

Investment Categories

Mutual funds are diversified, which means they are made up a variety of investments. By having many different investments, you lower your risk. Because someone else manages your portfolio of investments, you don’t have to deal with diversifying or managing individual investments yourself – that’s the fund manager’s job. Since the fund managers receive compensation based on the performance of the fund, you can be certain they will work hard to ensure the fund performs well.

It is advisable to invest in different categories that fit your investment goals and risk tolerance in order to further diversify your portfolio. Some mutual fund companies even offer a group of funds with different investment objectives and allow investors to switch between funds, although there is a transaction fee associated with it.

How To Buy Mutual Funds

If you have invested in a 401k account or a college savings fund, chances are good that own some mutual funds. Mutual funds can also be directly purchased from a mutual fund company. There are many resources on the Internet that teach how to buy mutual funds. You can locate mutual fund companies by simply searching on the Internet. Once you become a shareholder, you’ll receive updates and statements alerting you to how the fund is performing and how much your investment is growing.

Contact the mutual fund to request a prospectus or information package and read it carefully. Look for funds that match your needs, and review key information such as portfolios, fees, sales charges and past performance. These are usually provided in easy to understand format, for comparison purposes. Remember to do a thorough research and choose a mutual fund that is appropriate for the level of risk you’re willing to take. Learn more about investing and financial planning before investing your money.

Considerations

Mutual funds are one of the most popular ways to build wealth. Most funds require only minimum investments, and you can start with as little as a few hundred dollars to a few thousand dollars, allowing you to own a diversified portfolio of investments much more cheaply than you could on your own. It is important to understand how they work and how to choose the most appropriate ones for your needs.