A mutual fund pools multiple investors' money into one "pot" and employs a manager to pair that money with different types of securities. Most mutual funds hold some combination of stocks and bonds.
Decide to Diversify
Diversification represents the primary benefit of mutual funds over other types of securities. While your money might funnels through a single mutual fund, it spreads out among numerous types of investments, which means instant diversification.
You've probably heard financial experts expound on the benefits of a diverse portfolio. As long as you choose diverse mutual funds, you automatically become diversified.
Less Investment - Less Risk
Many young or beginning investors start with mutual funds because they require less start-up capital than other investments. You might begin with an outlay of only $1,000, for example.
Risk-averse consumer groups, such as retirees with fixed incomes, also often default to mutual funds. It allows them to stay in the game, but it doesn't require them to invest huge sums or to take unnecessary risks.
Mutual Fund Mechanics
Each mutual fund develops a prospectus, which details the objectives for that particular financial vehicle. The mutual fund manager respects those objectives when plugging investors' money into stocks, money market accounts, and other investments.
As the market changes the manager buys and sells financial instruments to reflect the changing needs of the mutual fund. He or she serves the mutual fund itself as well as the investors, attempting to generate revenue.
Understanding mutual funds helps you develop a diverse portfolio and take advantage of all the investment vehicles available to you. Sign up for Mint to gain more control over your financial future and your investment portfolio.