In the world of investing, most are familiar with the practice of purchasing individual securities to establish their own investment portfolio. For example, you may purchase 3-4 different stocks or bonds as a means of investing for retirement. You manage them on your own making your own decisions – buying and selling them based on your financial goals.
However, what if you didn’t want the hassle of purchasing your own individual securities and managing them. That’s where mutual funds come in. Think of mutual funds as the “grocery bag” of investment vehicles.
Similar to a grocery bag that may contain a variety of items from different areas of the grocery store, mutual funds contain a number of different investment vehicles within the mutual fund. A single mutual fund may contain hundreds of different stocks or bonds or a combination of both. When you purchase a mutual fund you are investing in all the securities associated with that fund.
Mutual funds are created and managed by asset management companies like T. Rowe Price, Vanguard and Fidelity. Large banks like Wells Fargo or Bank of America may also provide their own mutual fund investment options. A mutual fund is managed by a portfolio or fund manager. The fund manager’s sole purpose is to maximize the return on the specific mutual fund they manage.
There are literally thousands of mutual funds. Each mutual fund has a specific investment goal and strategy. For example, you may decide to purchase mutual funds related to the computer industry, because you believe the industry has high growth potential. Or you may purchase mutual funds that are less risky. Funds that focus more on consistent growth and contain a higher concentration of government bonds. Whatever your investment goal it’s likely there is a mutual fund for you.
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What is a Mutual Fund and How do they Work?
- Similar to stocks mutual funds are purchased on a per share basis. The share price of a mutual fund is called the NAV – Net Asset Value.
- Most mutual funds require a minimum to initially invest in the fund – some as low as $2,000-$3,000. After the initial investment, you can make additional contributions as low as $100. IRA contributions start as low as $1,000.
- Mutual funds are traded on the stock market and use a ticker symbol to identify the fund.
- Because mutual funds contain literally hundreds of stocks and bonds they inherently provide a level of investment diversification – unlike purchasing a single stock where “all your eggs are in one basket”.
- Mutual funds are often found as investment options within a 401(k) or IRA account.
- You make money from mutual funds based on the dividends paid out by the stock or interested earned from the securities within the portfolio.
- You can purchase mutual funds directly from an asset management company like T. Rowe Price, some banks or from online brokerage firms like E*TRADE.
Mutual funds are another option that can provide the average investor with numerous investment choices. Mutual funds are most appealing because they provide a level of diversification that other investment vehicles do not, and they are “managed” so there is a level of comfort knowing a professional is handling your investment.
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Do you invest in Mutual Funds? Comment below.