1. 20 Investments: Introduction
  2. 20 Investments: American Depository Receipt (ADR)
  3. 20 Investments: Annuity
  4. 20 Investments: Closed-End Investment Fund
  5. 20 Investments: Collectibles
  6. 20 Investments: Common Stock
  7. 20 Investments: Convertible Security
  8. 20 Investments: Corporate Bond
  9. 20 Investments: Futures Contract
  10. 20 Investments: Life Insurance
  11. 20 Investments: The Money Market
  12. 20 Investments: Mortgage-Backed Securities
  13. 20 Investments: Municipal Bonds
  14. 20 Investments: Mutual Funds
  15. 20 Investments: Options (Stocks)
  16. 20 Investments: Preferred Stock
  17. 20 Investments: Real Estate & Property
  18. 20 Investments: Real Estate Investment Trusts (REITs)
  19. 20 Investments: Treasuries
  20. 20 Investments: Unit Investment Trusts (UITs)
  21. 20 Investments: Zero-Coupon Securities
  22. 20 Investments: Conclusion

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.)



Strengths
  • No matter how much you invest, you get to own several companies. In other words, you get instant diversification.
  • You can easily make monthly contributions.
  • Your money is being managed by a professional manager. Because of his/her experience and knowledge, you should receive above average returns, at least in theory.

  • Weaknesses
  • The majority of mutual fund companies don\'t come close to beating market averages like the S&P 500 and the DJIA. (Notice we said you will receive above average returns "in theory". This will be discussed in detail in future pages.)
  • Fund managers take a slice of the profits for their work. This slice varies, but it can be quite high.
  • You pay management fees whether the fund actually makes you money or not.

  • Three Main Uses
  • Capital Appreciation
  • Provides Income
  • Tax-Deferred Savings
  • 20 Investments: Options (Stocks)

    Related Articles
    1. ETFs & Mutual Funds

      A Mutual Funds Guide for Young Investors

      Learn 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.
    2. Investing

      Advising FAs: Explaining Mutual Funds to a Client

      More 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.
    3. ETFs & Mutual Funds

      4 Mistakes to Avoid When Choosing Mutual Funds to Invest in

      Mutual 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.
    4. ETFs & Mutual Funds

      Looking to Buy Mutual Funds Online? Here Is How

      Learn how to buy mutual funds online; discover which websites offer mutual fund trading services, how to choose a fund and typical fees.
    5. ETFs & Mutual Funds

      The Advantages Of Mutual Funds

      Learn how to get diversification, liquidity and professional management at an affordable price.
    6. ETFs & Mutual Funds

      The Benefits of Picking Mutual Funds Over Individual Stocks

      Learn about the advantages of investing in mutual funds rather than individual stocks, including the benefits of affordability, oversight and diversification.
    7. ETFs & Mutual Funds

      When To Sell A Mutual Fund

      Unhappy with your mutual fund's returns and thinking of investing elsewhere? Read this article first.
    8. ETFs & Mutual Funds

      Mutual Funds Are Awesome - Except When They're Not

      This investment is very popular, but that doesn't mean it comes without risk.
    9. ETFs & Mutual Funds

      Mutual Funds

      What mutual funds are: Professionally managed pools of stocks, bonds and/or other instruments that are divided into shares and sold to investors. Pros: Diversification; liquidity; simplicity; ...
    10. ETFs & Mutual Funds

      A Guide to Mutual Funds Trading Rules

      Make sure to review this guide on the dos and don'ts of mutual fund trading before you invest, including how trades are executed and which fees to look out for.
    Trading Center