A Mutual Fund is a portfolio that consists of a pool of money gathered by multiple investors that are made to purchase different securities, such as stocks, bonds, etc.. Basically, you are investing in multiple stocks by just putting your money into one place.
In this article, we are going to talk about why one would invest in a mutual fund and the different types of mutual funds.
Why Would I Invest in Mutual Funds?
There are multiple different reasons as to why one would want to invest in a mutual fund. Before getting into that, it is important to note the fees that come along with mutual funds. The Annual Operating Fee come as a percentage of the amount of money you have invested, which is usually around 1%-3%. The next is the Shareholder Fee, which are paid right when you buy/sell the mutual fund.
With that being said, let's get into the points as to why one might want to buy a mutual fund:
1.) Safety
Since a mutual fund is a group of stocks all under one symbol, you are diversifying your portfolio easily. This lowers your risk because if one of the stocks in the mutual fund is red, it is probable that many other of the stocks will be green and overrule the decrease. Diversifying your portfolio is one of the most important lessons any trader learns and buying a mutual fund does it automatically.
2.) Hands-Off
Mutual funds are very easy to buy because of how little attention you have to pay to them. Since another person is trading stocks for you, you do not have to go through the stress of picking stocks yourself. This saves you lots of time and effort that you can spend doing something else. But always buy mutual funds that are highly recommended to ensure you put your money in the right hands.
3.) Clarity
If you are every wondering which stocks your mutual fund contains, it is extremely easy to look into. Mutual funds are required to state which stocks they are invested in so its investors always know what they are getting into. The transparency of mutual funds makes them very trustworthy and a safe investment for the long term.
What are the Different Types of Mutual Funds?
There are multiple different types of Mutual Funds so in this section, we are going to discuss only the most popular.
1.) Equity Funds
This is the most popular type of mutual fund. It is the basic type where the mutual fund buys different stocks into their portfolio. They often stick to a certain cap size, as well as domestic or foreign stocks. If you are looking for a good mutual fund to hold for the long term, this is a good category to start with.
2.) Fixed-Income Funds
Considered to be a very safe and steady fund, this type buys securities that have a return that is set. The most popular investments are different types of bonds. Basically, this fund generates this guaranteed return and then passes it on to its shareholders. The only problem with this type is the interest rate. Basically, if interest rates go up then the value of the fund decreases.
3.) Index Funds
An Index Fund is exactly what is sounds like. It is managed to buy stocks that mirror popular stock indexes, such as the Nasdaq, S&P 500, or Dow Jones. Since this stock is often very easy to manage, many of the up-front costs are much lower.
Now you hopefully know what mutual funds are and the different types of them. Before investing into any mutual fund, look to see online if it is recommended by its shareholders. Always do research into the stocks that the mutual fund is holding as well as their performance in the past. Remember that mutual funds are usually long-term investments and can incur large fees that take some time to recover from.