What Is It?
Are you someone who wants to invest (or already does), but doesn't want to bother deciphering a company's numbers and deciding whether or not the stock is a good buy? Or are you someone who finds the risk and volatility of the stock market stomach-turning?
If this describes your personality, you are a prime candidate for mutual funds. A mutual fund is simply a large group of people who lump their money together and give it to a management company to invest it on their behalf. A mutual fund manager proceeds to buy a number of stocks from various markets and industries. Depending on the amount you invest, you own a part of the overall fund.
Objectives and Risks
For the most part, investors should buy mutual funds as a long-term investment. The nice thing about mutual funds is that the objectives change from fund to fund. Each mutual fund has a different strategy - it is your job to decide what your objectives are and which fund best suits those objectives. Mutual fund strategies include growth/aggressive, low risk, balanced, momentum, and many others.
Your risk tolerance will play a big role in determining which fund you purchase - it all comes down to the old risk/return tradeoff. For example, if your fund is meant for retirement, then perhaps a low-risk money market fund is best for you. Many funds justify their under-performance as a factor of risk. For example, a mutual fund might fall short of beating the S&P 500, but at the same time it offers a beta (risk) that is much less than that of the market. If you are willing to sacrifice some performance in return for a good night's sleep, then these "low-risk" funds are a good option.
How To Buy or Sell It
There are thousands of different mutual funds out there. Most of them can be purchased directly through the mutual fund company, a bank, a brokerage or a financial planner. The commissions on mutual funds can vary widely depending on the company and the style of the fund. A load mutual fund charges you for the shares bought, plus a sales fee. A no-load fund sells its shares without a commission or sales charge, but management fees can be higher. (For an in-depth look at mutual funds, see our Mutual Fund Basics Tutorial.)
20 Investments: Options (Stocks)
Three Main Uses
Financial AdvisorLearn how mutual funds work, why they are so popular and how younger investors can get started by putting mutual funds in their IRAs or 401(k)s.
Financial AdvisorMore than 80 million people, or half of the households in America, invest in mutual funds. No matter what type of investor you are, there is bound to be a mutual fund that fits your style.
InvestingMutual funds are a great way to build wealth but not all of them are the same. Investors have to be mindful of fees, turnover, redundancy and performance.
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InvestingLearn how to get diversification, liquidity and professional management at an affordable price.
InvestingLearn about the advantages of investing in mutual funds rather than individual stocks, including the benefits of affordability, oversight and diversification.
InvestingUnhappy with your mutual fund's returns and thinking of investing elsewhere? Read this article first.
InvestingWe list some options other than mutual funds for your retirement plan.
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