Mutual funds give investors the ability to diversify across a wide variety of investments that they otherwise may not carry in their portfolio as individual securities. Since mutual funds invest in a diverse range of securities and investment options, one mutual fund share actually represents proportionate ownership in each and every investment in the mutual fund’s portfolio. Of most interest to investors is that each share also proportionately represents the profits of those investments as mutual funds are required to pass along profits to their investors by way of mutual fund distributions, which come in several forms.
Variety: Mutual Funds Come In Many Different Categories and Types. As you grow your portfolio of mutual funds, you will want to diversify into various mutual fund categories and types. You can invest in mutual funds that cover the main asset classes (stocks, bonds, cash) and various sub-categories or you can even venture into specialized areas, such as sector funds or precious metals funds. Affordability: Mutual Funds Have Low Minimums, Most mutual funds have minimum initial investment requirements of $3,000 or less. In many cases, if the investor initiates a systematic investment program, where they have a fixed dollar amount or fixed number of shares purchased once per month, the initial investment can be as low as $1,000.
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While it can be confusing, the answers to the following three questions will help you navigate the mutual fund waters—from how they work to how to add them to your investment portfolio. What Is a Mutual Fund? For all intents and purposes, mutual funds serve as an alternative for investors who can’t afford an individually managed account. Mutual funds are formed when investors with smaller amounts of capital, pool their money together and then hire a portfolio manager to run the consolidated pool’s portfolio—subsequently buying different stocks, bonds, or other securities in a manner consistent with the fund’s prospectus. Each investor then receives their respective piece of the pie while sharing the expenses, which show up in something called the mutual fund expense ratio.
Thanks to computers and the Internet, investing in mutual funds has never been easier. That said, there are many important considerations an investor should take into account before adding shares of a mutual fund to their portfolio. Mutual funds come in a multitude of varieties, including those that focus on different asset classes, those that seek to mimic an index (also known as index funds), and those that focus on dividend stocks. The list covers everything from geographic mandates to those that specialize in investing in securities that fall within a certain market capitalization.
Mutual Funds are Professionally Managed. Many investors don’t have the resources or the time to buy individual stocks. This is where professional management is valuable. Investing in individual securities, such as stocks, not only takes resources but a considerable amount of time. By contrast, mutual fund managers and analysts wake up each morning dedicating their professional lives to researching and analyzing current and potential holdings for their mutual fund.