Mutual funds are the most popular investment among individual investors, like you. If you have a 401(k) or work with a financial planner, you most likely own a few mutual funds.
Mutual funds are popular because they give you instant diversification in your investment portfolio without you having to worry about buying and selling a bunch of stocks.
How a Mutual Fund Works
A mutual fund is a firm that accepts money from investors and then employs a fund manager to invest that money according to the rules that have been developed for that particular fund. For instance, if you put your money into a mutual fund that invested in big, multi-national companies, the fund manager would take your money—and the money from all of the other investors in the mutual fund—and buy stocks in companies like Microsoft and General Electric.
When you put money into a mutual fund, you are buying shares of that fund. As the entire fund increases in value, your shares also increase in value. As the entire fund decreases in value, your shares also decrease in value.
Benefits of Investing in Mutual Funds
Investing in mutual funds has many benefits for individual investors, like you. Some of the benefits you could enjoy are:
Investing in mutual funds also has a few drawbacks. Some of the drawbacks are:
- Fees
- Taxes
- Potential of underperforming the market
Video: What are Mutual Funds?
Now that you've got the basics of what a mutual fund is, check out the video below and see what else you can learn about mutual funds at the whiteboard.
