What is a Mutual Fund?
A mutual fund is a type of investment strategy that allows a group of individuals to pool their money together to purchase stocks, bonds and other securities that might be difficult to obtain individually. Mutual funds are managed by highly skilled professionals who allocate specific investments for the pooled funds and attempt to produce capital gains or income for the individual investors.
Breaking Down Mutual Funds
Pooling money together to create mutual funds allows individual investors to access professionally managed investment portfolios. Each investor, therefore, has a share in the profits and losses made by the fund. The performance of the fund is usually measured as the change in the total market capitalization of its portfolios. This is derived by combining several performance indexes of each investment.
Mutual funds are both investments and actual companies. Just like someone may buy Apple stocks to own part of the company and its assets, investors who put their money in mutual funds are buying part of the fund company and its assets. The only difference is Apple specializes in manufacturing phones and computers while a fund company specializes in making investments. The total value of the fund company depends on how well the securities it trades with perform in the market.
Benefits of Investing in Mutual Funds
Mutual funds are monitored and managed by highly skilled individuals. Professional management ensures wise investment choices and better returns. In addition to professional management, mutual funds allow for asset diversification. Investors can choose to put their money in different sectors of the economy to reduce the impact of the performance of one security on the entire portfolio.
Mutual funds allow investors to achieve economies of scale when purchasing and selling securities. The more securities they buy the more they save money in discounts and price reduction. Mutual funds also offer liquidity. One can easily sell his securities in a short period of time without worrying about any fluctuation in the sale price and current market value.
How to Select the Right Fund
Every mutual fund has a specific investment strategy or purpose. Some, for example, focus on blue-chip companies. Others invest in startups and specific economic sectors. It is thus important to find a fund that fits your investment criteria and style. If you don’t know anything about financial marketing, you have no business investing in a financial marketing fund.
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Getting Started in Fund Investment
Once you have settled on the right type of fund, you need to create a brokerage account. Most companies require entrants to pay an application fee together with an initial investment amount. The initial investment can be as low as $25. It is advisable you consider the type of account you will be investing in and the amount you will pay as taxes before you buy any fund. The amount you will pay as tax depends on the type of investment account. The most common investment accounts are taxable brokerage account and tax-advantaged account. Taxable brokerage accounts allow you to pay capital gain tax on the profits while tax-advantaged accounts allow you to avoid taxes until you make a withdrawal.
Purchasing mutual funds is an effective way to diversify your investments. A mutual fund allows you to choose from a wide range of options available out there, including bonds and stocks.