What Is a Mutual Fund?
A mutual fund is a collection of investment money pooled from lots of people to be invested for a specific objective. When you invest in a mutual fund, you buy shares and become a shareholder of the fund. A fund manager and his or her team of assistants figure out in which specific securities (for example, stocks, bonds, or money market funds) they should invest the shareholders’ money so that they can accomplish the objectives of the fund and keep you (and your fellow shareholders) as a happy customer. Because good mutual funds take most of the hassle and cost out of figuring out which securities to invest in, they are among the best investment vehicles ever created:
1. Mutual funds allow you to diversify your investments, that is, invest in many different industries and companies instead of in just one or two. By spreading the risk over a number of different securities representing many different industries and companies, mutual funds lessen your portfolio’s volatility and the chances of a large loss.
2. Mutual funds enable you to give your money to the best money managers in the country, some of the same folks who manage money for the already rich and famous.
3. Mutual funds are the ultimate couch potato Investment! However, unlike staying home and watching the TV or playing Nintendo, investing in mutual funds can pay you big rewards.
What’s really cool about mutual funds is that once you understand them, you realize that they can help you meet a bunch of different financial goals. Maybe you’re building up an emergency savings stash of three to six months’ living expenses (a prudent idea, by the way). Perhaps you’re starting to think about saving for a home purchase, retirement, or future educational costs.
You may know what you need the money for, but you may not know how to protect the money you have and make it grow. Don’t feel bad if you haven’t figured out a long-term financial plan. And don’t feel bad if you don’t have a goal in mind for the money you’re saving. Many people don’t have their finances organized.