Mutual Fund Investing Basics
What is a Mutual Fund and How Does it Work?
What is a Mutual Fund?
A mutual fund is an investment vehicle that allows investors with similar objectives to pool their money. Investing in mutual funds is an ideal way to achieve balance and diversification in your portfolio.
How Does a Mutual Fund Work?
The mutual fund’s professional manager is responsible for investing the funds in various securities – usually stocks or bonds – that meet the financial objectives of the fund. When investors buy a mutual fund, they are buying shares of a portfolio of stocks or bonds – as opposed to investing in shares of an individual company.
Each mutual fund has a stated investment objective that is fully described in its prospectus. Objectives include “long-term growth of capital,” “high current income and total return,” “long-term capital appreciation” or “high current tax-free income,” to name just a few. Based upon the fund’s investment objectives, professional money managers create and maintain an investment portfolio that typically specializes in either equity or fixed income securities.
Why Should I Choose a Mutual Fund?
Investing in mutual funds gives investors the advantage of professional money management since the mutual fund manager is responsible for managing the shares that affect the performance of the fund. Fund managers research the companies in which the fund will choose to invest, and they actively manage the fund to ensure that it stays on track to meet its stated objectives.
The benefits of investing in mutual funds:
- Professional investment management. Manager research means that you do not have to do it on your own
- Well-diversified investments. This benefit guards against the volatility of owning a single investment (i.e., stock in one company)
- Flexibility and liquidity. An investment manager can accept purchases and redemptions on a daily basis, which allows you to access your investments if needed
- Low minimum investment. Most fund companies enable investors to purchase shares of a mutual fund for a relatively small initial investment
