How Mutual Fund Investing Works

Chances are, you’re reading this because you know that a portfolio of investments is a smart choice when you’re planning for your future. By not putting all your eggs in one basket, you are diversifying your holdings so you don’t risk losing all your wealth in one downturn.

When setting long term financial goals, mutual funds can be a good choice and have become increasingly popular over the past few years with investors, both new and experienced.

How Mutual Fund Investing Works

A mutual fund is a managed investment fund. The way it works is that investor money is pooled and invested collectively.  You can buy shares in the mutual fund rather than having to invest in a range of securities individually. The managers of the fund will make these steps and decisions for you, saving you money and time.

They apply their considerable experience and expertise to help generate better returns on your money. In exchange for this you will have to pay a small fee when buying shares in the mutual fund. The term mutual fund applies to structures that are regulated and sold to the general public.

How Do I Buy Shares Of A Mutual Fund?

You can buy shares in a mutual fund from a variety of regulated financial institutions –including your stock broker, your bank, licensed financial advisers and even directly from the mutual fund company itself.  Make sure you check the specific details of the fund you are investing in before putting in your money.  Whoever you buy with do your research in advance and once you have decided which mutual fund you want to buy shares in it is straightforward to achieve this.

What Are Some Of The Ideas Of Mutual Funds?

Although the idea of pooling investments is the same for mutual funds each one is very different. Some funds will invest in stocks only, some in bonds only and some in a mix of different securities. A great advantage of mutual fund investing is that the managers have knowledge and expertise that can be applied to generate a better rate of return.  As part of utilising the expertise to the best of their ability mutual funds are often set up with a certain theme or sector of focus. This helps you capture market opportunities within a smaller subset of investments.

Sectors And Themes

• Sector funds are based on specific sectors within a broader asset class. For example, high yield funds are bond funds which invest in junk bonds only. Technology equity funds invest in the equities of technology companies only.
• There are also theme based funds. Examples of these include “growth” and “value” equity funds. Value funds focus on investing in equities that look under-priced and are expected to provide good value for money. Growth funds invest in equities that are expected to see a fast rate of growth.
• Other more recent examples of themes include environmental funds that invest in companies that have environmentally-friendly working practices.

Whichever mutual fund investment you select make sure you do your research beforehand to fully understand the risks and costs involved and to check if the fund will help you meet your financial goals.

Find out the Difference Between Stock And Stock Fund.