Understanding Mutual Funds
Understanding Mutual Funds
Before you can successfully invest in mutual funds, you need to understand what they are and how they work. Let’s take a look at the basics so you can learn what will make a difference in your portfolio’s performance and what won’t. We’ll start from the beginning—what is a mutual fund?
Mutual Fund
A mutual fund, according to the Securities and Exchange Commission (SEC), “is a company that brings together money from many people and invests it in stocks, bonds or other assets.” In other words, a mutual fund is like a basket, and that basket holds assets, like stocks. When you buy a mutual fund, you purchase a piece of the fund, or basket. You do not actually own any of the assets the mutual fund owns.
But while you may not own the assets themselves, they are important because the value of the fund is based on the value of the assets it holds. As the stocks, bonds and so on within the fund increase in value, the fund increases in value. Conversely, as the stocks, bonds and so on within the fund decrease in value, the fund also decreases in value.
Now that you know what a mutual fund is, what are the benefits of mutual funds?
Benefits
Mutual funds offer two key benefits: diversification and professional management. Diversification means owning many different assets at one time. Mutual funds offer instant diversification because each fund, or basket, owns multiple stocks, bonds and so on. When you buy a piece of the fund, you essentially buy a piece of every asset held by the fund.>
Professional management means that somebody who spends a lot more time analyzing financial markets than you do will be helping you invest your money.
Now that you know what the benefits of mutual funds are, what types of mutual funds are available?
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