A mutual fund allows you to invest in a basket of individual stocks or bonds with relatively lower risk.
What is a Mutual Fund
A mutual fund is a type of investment in which a group of individuals pool their money to buy a basket of stocks or bonds, that are selected and managed by a professional investment team. When an individual buys a mutual fund share, that money in invested in stocks or bonds held within the mutual fund. Any profit (or loss) made by the fund is periodically distributed to the individual investors.
Why should I invest in Mutual Fund
Mutual funds provides an easy option to diversify across multiple investments for those individuals who are not interested in researching and buying individual stocks or bonds. It is specially handy for those who are new to investing or want hands-off approach. Additionally, you get a professionally managed team that runs the fund based on a specific goal.
How can I buy Mutual Fund?
The easiest way to buy mutual fund is by opening an account in an online brokerage firm. You start by depositing cash in your account, research on what mutual fund you are interested, buy and hold them, and sell as per your financial needs.
What are different types of Mutual Funds
There are multiple types of mutual funds, each designed to meet a specific investment goal:
- Stock Funds – Invest in company stocks from certain industry, country, or region.
- Bond Funds – Invest in bonds from corporation, government or municipality.
- Target-Date Funds – Invest in a mix of stocks and bonds targeted for a specific retirement date
What are the advantages of Mutual Funds
Advantages in investing in mutual funds are:
- Convenience – You can buy or sell funds on any business day
- Diversification – You hold a variety of stocks/bonds at a lower risk and lower cost than individual ones
- Periodic Returns – A fund may provide periodic profit on your investment
- Professional Management – A professional team will manage individual stocks/bonds within the fund
What are the disadvantages of mutual funds
You will be paying a fee to the professional team that manages the fund which may impact the overall return on your investment. Additionally, you will have no control over the individual stocks or bonds within the fund. Remember, mutual funds are not FDIC insured, meaning unlike Bank CDs, you may lose your money in the investment.
How do I manage risk of investing in mutual funds
There are multiple options to lower risk of mutual investing:
- Buy funds that are rated high quality
- Buy funds of a category that you are familiar with
- Buy Target-Date funds as per your retirement needs
Final Verdict
Though mutual funds investment is considered safer than individual company stock investment, they do charge fees that may lower expected returns. Make sure you discuss your financial situation with a registered financial advisor before making any investment decision.
We hope the information in this post will be helpful in your journey of aspiring nirvana!
Helpful Links: https://en.wikipedia.org/wiki/Mutual_fund