If you are looking for a hassle free and low risk way to invest money, one thing you may be interested in learning more about are mutual funds. Today we’ll talk about what is a mutual fund, how mutual funds work, how you can invest in mutual funds and explain the risks associated with this investment strategy.
What is a Mutual Fund? How Do Mutual Funds Work?
Mutual funds are a pool of diversified stocks you can invest in. They are a popular option for many investors because they are generally considered to be a lower risk way to invest.
With a mutual fund, a company which specializes in these types of investments will invest the money of a pool of several investors in a number of stocks, bonds, securities, assets, and other short-term investment opportunities.
All of these different investments the company is invested in is what is known as the company’s “holdings”. The combined holdings owned by the mutual fund is what is known as the portfolio. When you become a shareholder of a mutual fund, you actually become a shareholder of the entire company.
Each share that you own is a representation of how much share you have in the pool of the company’s investments.
When the company makes a profit, you will earn dividends based on your investment of shares. However, bear in mind if the company faces a loss you will also notice the value of your shares decreasing.
What are the Benefits of Mutual Funds?
There are many reasons why investors are interested in mutual funds. The biggest advantage of investing in a mutual fund is that everything is mostly managed by the holdings company. You have very little involvement concerning which investments are made and the management of these investments. These investors work on your behalf, making it their full-time job to choose the wisest investments as possible.
This is a very good idea if you are someone who is very busy or would prefer to let someone with more experience make the decisions. It can take a lot of practice and experience and time to be able to choose the best investments.
For example, if you are buying stocks, you would likely have to spend a lot of time researching candlestick patterns in order to determine if it were a stock you wanted to buy. Of course, then even after that, you would have to constantly monitor the performance of the stock to ensure you are making money.
For this reason, for many investors, mutual funds are attractive because they do not require a lot of time, research, or experience. By trusting your money with the mutual funds company, you will be able to spend more time enjoying your dividends earnings and a lot less time worrying about whether or not you are in a high risk investment.
Understanding the Different Types of Mutual Funds
There are a few different types of mutual funds you will want to research more about as you choose what to invest in. Understanding the different types of mutual funds is helpful to help you make the best possible choice in your investment strategy. If you are sitting down with a broker, it can also help to be familiar with these terms as they discuss different options and opportunities with you.
Equity funds: These types of mutual funds involve only common stock investments. Equity funds have the greatest potential to earn a lot of profit, but are also very risky, since the stock market can be quite unpredictable!
Fixed income funds: These types of funds include corporate and government securities in the form of bonds and other similar investments. Because these types of funds generally invest in fixed-rate securities where the expected return is stable, these funds offer returns at a low risk. However, these types of funds are generally a long-term investment, as it takes time for these low-risk investments to fully mature.
Balanced funds: Perhaps the perfect balance of the two, this is the combination of bonds and stocks with a low risk. However, it is important to note these investments are not always the best choice either, as sometimes the unpredictable market can take away the stability of a fixed-rate investment.
In determining which fund is right for you, it’s important to research the fund as much as possible. You will want to look up the company and research their latest news and look at the ratings and records. It is good to review as much information as you possibly can before you decide to purchase shares in a mutual fund.
How to Buy Mutual Funds: Getting Started
There are two main ways to purchase shares of a mutual fund. If you already have a brokerage account, this is a good place to start. You can often find mutual funds to invest in this way quite easily.
The other option is to contact the mutual fund company itself. This allows for you to choose the company you are most comfortable with. Most companies have an application that you can fill out to apply for more information.
You may also wish to talk about all of this with a financial advisor. A financial advisor can help ensure you are investing your money wisely and that you fully understand the risks and benefits with your choice of mutual fund investments.
An advisor can sometimes provide good insight drawn from their experience working on the financial behalf of others on which mutual funds make the right sense for you. They can help you choose the right decision based on your risk assessment and current financial goals.
Is there a minimum amount I will need to invest?
There often are many minimum numbers of shares or fixed dollar amount you will need to invest. This largely depends on which mutual fund you decide to invest in. Most times the amount can be as little as $1,000-$5,000, although there are a few select mutual funds which will require a minimum investment amount of $25,000 or more.
Also, many times it is recommended that you continually add a deposit to your mutual fund, much as you would if you were investing in a high yield savings account. This is often done through automatic withdrawals from your bank account.
For example, you may decide to have $100 each month put into your mutual fund account to be invested. By investing more money consistently, you will likely see a greater return. However, bear in mind mutual funds can have their risks, so it is important to take that into consideration.
Should You Invest In Mutual Funds? How Much Money Can You Make?
Like any type of investment, there is always a little bit of risk. Sometimes it’s important to assess what types of opportunities exist for your money to you choose. For many people, investing in a mutual fund can be an excellent way to diversify your own investment portfolio, and can give you multiple streams of potential investment income.
Mutual funds are not entirely risk-free, and it is important to always remember this. You do not know if the value of your shares will rise or drop, and so looking at the track record of any mutual fund you decide to invest in can give you a good insight on whether you will be able to earn the dividends to meet your financial goals or whether it could potentially cause you to lose money.
Ultimately, we cannot tell you how much money you can make with mutual funds, because how much you invest and the amount of time you invest will all play a large factor into what types of returns you might expect.
Like you would with any type of investment, learning how to minimize your risk in diversifying your portfolio is very important. Learning about the different types of investments can certainly make a big difference to your overall bottom line!
Are Mutual Funds So Popular for a Reason?
We have seen more and more people take interest in mutual funds, especially when compared to decades ago when they were not as common.
Are you thinking of investing in mutual funds or have experience with mutual fund investments? Have any tips or additional information on the subject? Share your thoughts in the comments section below!