If trillions of dollars are invested in something all over the world, that means they’re probably doing something right and you’d want to get in on it, wouldn’t you? Yeah, us too.
Mutual funds have become a popular choice with investors. In fact some investors put the majority of their portfolio into mutual funds because of the benefits they offer.
What Are Mutual Funds?
When you invest in a mutual fund you are actually investing in a collection of stocks, bonds and other securities. A mutual fund brings together a group of investors and their money to invest collectively in stocks, bonds, and other assets. Each investor owns a share of the mutual fund, which represents a proportionate amount of the fund and its performance.
There are actually three different classifications of mutual funds—open-end funds, unit investment trusts, and closed-end funds.
- Open Ended: The most common form is open-end funds. These types of funds offer the option to buy back shares from investors every business day – giving you flexibility to get out of the investment if you wish.
- Unit trusts: These allow you to sell back your shares in the funds at any time and have a limited life span that is established from the outset. Unit investment trusts also are not changed by an investment manager over the course of the investment term – the portfolio of securities is established at unit trust time of creation and does not vary.
- Closed-Ended: Closed-end funds are less flexible. They issue shares once at creation and following this the shares of the fund are then listed on a stock exchange for trading. If you wanted to get out of the investment you can’t sell the shares back to the fund (as with an open-end fund). Instead, you have to sell them to another investor in the market – assuming you can find one.
Why Do People Invest In Mutual Funds?
Mutual funds can be a great source of investment return on your money.
- Dividends: To begin with, some mutual funds may pay dividends. This can be a frequent source of income to your portfolio and will normally be generated from stocks and bonds in the mutual fund portfolio. A fund will typically pay almost all of the income it generates to fund shareholders. Mutual funds will normally give you the choice to receive your income distributions periodically or to reinvest the earnings and put the money towards getting more shares in the fund.
- Capital Gains: The fund can also have substantial capital gains to your money. If you have selected a mutual fund with managers then you will benefit from their expertise in generating higher levels of returns and lower levels of risk to your money. Another benefit is that if the mutual fund is performing well you might be able to sell your shares in the mutual fund for a higher price at which you bought – giving you a profit.
Benefits of Mutual Funds
The biggest advantage of investing in a mutual fund is that the selection of assets in the mutual fund is carried out by financial professionals who will most likely be better at generating a good return and minimising risks to money invested. Investing in a mutual fund also means you can invest in a range of different assets in one go without the costs and hassle of managing each investment separately. Buying each asset separately can involve a lot of transaction costs which can be minimised by mutual fund managers when they pool investor money.
Overall, you can save time, money and hassle and you may benefit from higher returns on your money. You can diversify your portfolio and this is beneficial to reaching your long term investment goals. Large mutual funds can own hundreds of different stocks in many different industries – something that the average individual investor would struggle to achieve alone with limited capital. Investing in a mutual fund can make your investments simpler. In addition the minimum investment is small – and can start from as little as $100 on a periodic basis, monthly for example.
Common Risks of Mutual Funds
Make sure you do your research on the mutual fund and its managers. Some managers have good track records and some not so much – the risk is tied a great deal to the ability of the managers of the fund. Also keep in mind that there are costs involved with investing in a mutual fund. Fees vary widely from fund to fund and so you pay close attention to the charges before committing your money.
Also be aware that if a fund gets too big it can suffer from dilution. This happens when funds have small holdings too many different companies so that high returns from a few of these investments do not make enough impact to overall returns.
Overall investing in mutual funds can be a good source of returns when investing. However all mutual funds are different and you should check out the details properly beforehand so that you find the one that best meets your financial needs and circumstances.
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