A mutual fund is a type of investment that pools money from a lot of different investors and uses that money to buy other assets, like stocks and bonds. Mutual funds are managed by professionals, who decide which investments to buy and sell to try to make money for the fund’s investors.
What is a Mutual Fund and how does it work?
Mutual funds are a type of investment vehicle that allow investors to pool their money together in order to purchase stocks, bonds, or other securities. The fund manager of a mutual fund will use the pooled money to buy a variety of different investments, which can then be divided up and sold to individual investors. Mutual funds offer investors several benefits, including professional management, diversification, and economies of scale.
Types of Mutual Funds
There are a variety of mutual funds to choose from, and each type has its own benefits and risks.
The most common types of mutual funds are:
- Index funds track an index, such as the S&P 500. They are passively managed and have low expenses.
- Sector funds focus on a particular sector of the economy, such as technology (NASDAQ) or health care.
- Target-date funds automatically shift their investments to become more conservative as the target date approaches.
- Balanced funds hold a mix of stocks and bonds and can provide stability in down markets.
- Equity funds invest in stocks, while fixed-income funds invest in bonds.
- Money market funds invest in short-term debt instruments, such as certificates of deposit (CDs) and Treasury bills (T-bills).
How to buy Mutual Funds
When buying mutual funds, you have two main options:
- Buying mutual funds directly from the fund company, you will need to fill out an application and send it in with your initial investment. You will also need to choose which type of account you would like to open: a regular account or a retirement account.
- Buying mutual funds through a broker, he or she will help you choose the right fund and will handle all of the paperwork for you.
For more, check our guide ‘Choosing your Broker or Online Exchange‘. Also check our Broker Platforms Reviews.
Mutual funds are a popular investment option for many people because they offer a number of benefits. However, it is important to understand the risks before investing in them.
To read more about the benefits of mutual funds and risks refer to this article: What You Really Should Know about Mutual Funds.
To learn how to diversify your investment portfolio read: Alternative investments and your Portfolio.