Beginners Guide to Understanding Mutual Funds

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

Everything you wanted to know but were afraid to ask – Stocks

A stock simply represent an ownership interest in a company with an expectation of reaping financial benefits if the company performs well.

Stock investing

What is a stock?

When a public company needs money to grow it’s business it can access that money via multiple options, one of which is by issuing stock to the public for a set price. An individual can then buy that stock for a price for which it is currently available in the stock market. By buying stock of a company the individual “owns” part of the company and hopes to make profit by selling at a higher price than initially purchased.

Why should I buy stocks?

Historically, stock market has provided about 8% return. It is one of the easiest way to generate passive income.

With zero trading fees, easy access to company performance, readily available analyst reports, one can buy/sell stocks with just a click of a button.

How can I buy stocks?

The easiest way to buy stock is by opening an account in an online brokerage firm. You start by depositing cash in your account, research on what stocks you are interested, buy and hold them, and sell as per your financial needs.

Why do stock prices fluctuates?

Stock price constantly fluctuates based on the supply and demand in the market.

The stock price of a company generally goes up if there are more buyers than seller and vice-versa. Stock price of a company tends to go higher if the company performs well (growth or profit) and thus more people are interested in buying its stock. On the other hand, stock price will drop if the company performs poorly .

Why are stock considered risky?

As stock price constantly fluctuates, you may lose your money if you need to sell at a time when the price is lower than your original purchase price. In fact, in rare cases, you may completely lose your money if company goes bankrupt. Remember, money invested in stocks is not FDIC insured, meaning unlike Bank CDs, you may lose your money in the investment.

How can I mitigate risk?

There are multiple options to lower risk of stock investing:

  • Buy Index Funds (basket of multiple stocks)
  • Buy Mutual Funds or ETFs (basket of multiple stocks in one category)
  • Buy stocks of well-known brands at a reasonable price and hold for long-term
  • Buy some bonds as they are more stable than stocks
  • Employ Dollar Cost Averaging, that involves buying stock with a fixed dollar amount each month

Final Verdict

Stock market has historically provided about 8% return and is one of the best way to earn passive income. But there are chances of losing money in it. Make sure you discuss your financial situation with a registered financial advisor before making any investment decision.

Stock investing
Stocks