Mutual funds are investments that gather the investors’ money into a pool to make multiple types of investments, known as the portfolio.
Professional money or investment managers, who invest the fund’s capital and attempt to produce capital gains for its investors, operate the mutual funds.
The investment manager’s compensation relies on how well the fund performs. In this way, you can be assured that they will work hard to make sure the fund grows well.
As a mutual fund investor, you become a “shareholder” of the mutual fund company. When there are profits you will earn dividends. When there are losses, your shares will decrease in value.
Mutual funds are diversified or are made up of different investments to lower the risk of loss.
Advantages of Mutual Funds
1. Mutual Funds give small investors the access to professionally manage, diversified portfolios of equities, bonds and so on. This is difficult and nearly impossible to create with a small about of money.
2. Each shareholder participates proportionally in the gain or loss of the funds.
3. The experts handle your money professionally…so even if you have little knowledge on stocks, you may learn as time goes.
Three Categories of Mutual Funds
1. EQUITY FUNDS. Equity funds are made up of common stock investments alone. Although this can be riskier, this can earn more money than other types of funds.
2. FIXED-INCOME FUNDS. Fixed-income funds are made up of government and corporate securities. Since the government and corporate securities provide fixed return, the risk of the investments are low.
3. BALANCED FUNDS. Balanced funds combine both stocks and bonds in the investment. It offers a moderate to low risk. So before investing to mutual funds, you will have decide how much risk you are willing to take.
Why Should You Invest in Mutual Funds?