February 27th, 2012 by InvestorPoint
When it comes to investing many people quote the old proverb “Never put all your eggs in one basket”. The logic is that it is wiser to diversify your investments across different products and sectors so that no one stock can wipe your savings. Whether you are an experienced investor or are new to the Stock Market you have probably heard the term “Mutual Fund”. Many people have investments in Mutual Funds through their employer’s 401k plans or their own personal Individual Retirement Accounts (IRAs) yet are unsure of exactly what a Mutual Fund is, what the financial benefits are and what the risks are associated with investing in Mutual Funds.
For a Complete Listing of Mutual Funds and Mutual Fund Families click here
Looking to shed some light on Investing in Mutual Funds we must first mention that any investment carries risk. Whether you invest in Bonds, Stocks, ETFs or Mutual Funds, there is some risk associated with the investment and you need to conduct you own thorough due diligence as well as consult an Investment Professional to help you make informed decisions about how you invest your money. Mutual Funds tend to have lower risk then investing in individual securities which make that an attractive alternative to those new to investing or who want to take a passive role in the allocation of their investment dollars.
In simple terms, Mutual Funds are a portfolio of stocks, bonds, precious metals or a combination of them whose ownership is spread among the Investors in that fund. The types of securities they purchase are based on the type of fund. For example, a Dividend Fund will purchase stocks that pay dividend, a Gold Fund will purchase Gold Mining Stocks as well as Gold Bullion and a Bond Fund will only purchase Bonds. One usually only needs to read the name of the fund to learn what its investment objective us but the exact investment objective and the types of securities they invest in are detailed in the prospectus which should be reviewed prior to any investment.
Mutual Funds enable investors to buy into a more diversified portfolio with less money than if they were to purchase the individual securities on their own and it spreads the risk among a group of people. Additionally, because an investor is not purchasing on individual stock or bond, this diversification can help reduce the downside risks to some degree. Please remember that investing in Mutual Funds, like any investment, carries risk and you can lose money in Mutual Funds.
Diversification is one of the key ingredients of a healthy portfolio and mutual funds will help you work the diversity you need into your portfolio in short order. If you are young and just beginning your career and in no real hurry for retirement this is one of the safest ways to invest your money for the long haul. Unfortunately it may lead to a comfortable retirement but is unlikely to lead to a flashy retirement, as most mutual funds do not have the high payoffs that many investors seek.
There are essentially three types of mutual funds with a few variations on each. First there are money market funds. These funds are great for the long-term investor who has a slow and steady approach to investing and will generally be better than leaving your money in a savings account collecting interest but there are better earning funds to be found. Second are the equity funds. These funds provide slow growth over time as well as some income along the way. Finally there are the fixed income funds. The purpose of these funds is to provide a current income over time. These are not funds that are anticipated to increase in value only to maintain a certain standard of living. This is great for those who have retired or investors that are extremely conservative in nature. Hopefully this finds you knowing a little more about mutual funds in general and preparing to learn even more about how to take control of your investment options and make these key decisions for your future and that of your family.
There are plenty of advantages and disadvantages in regards to purchasing mutual funds. You won’t find the flashy swings, dips, dives, and other grand maneuvers in the typical mutual funds. Most mutual funds are selected because of their stability not for in hopes of massive profits though some mutual funds are, admittedly, more aggressive than others. It really depends on how much of a gambler you are by nature and how much of your investment and retirement you are willing to risk whether or not you will be satisfied with mutual funds as part or all of your investment portfolio.