Since mutual funds are easy to understand and a smart investment choice for the majority of savers and investors, these security types are the most commonly held investments in 401(k) plans and IRAs. However, although mutual funds are relatively simple to use, they are not for everyone and investors should be careful to select the best funds that align with their goals and tolerance for risk.
The process of buying a mutual fund can be done over the phone, online, or in person if you are dealing with a financial representative. To place an order, you would indicate how much money you want to invest and what mutual fund you want to purchase. Whichever mutual fund you select, the price you pay for the shares will be determined by the closing share price at the end of that day.
Simplicity: Mutual Funds Are Easy to Understand, Anything can be made into something more complex than it needs to be and mutual funds are no exception to this truth. However, mutual funds require no experience or knowledge of economics, financial statements, or financial markets to be a successful investor. For beginners, here is a simple definition of mutual fund: A mutual fund is an investment security type that enables investors to pool their money together into one professionally managed investment. Mutual funds can invest in stocks, bonds, cash and/or other assets. These underlying security types, called holdings combine to form one mutual fund, also called a portfolio.
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.
If you’re a bit more experienced in investing or are fortunate enough to have a bit of money to ”play around with” for a while, a somewhat more aggressive approach might be right down your alley. Determining Asset Allocation. Once level of risk tolerance is determined, consider your desired asset allocation—the mix of investment assets (stocks, bonds, and cash) comprising your portfolio. The proper asset allocation will reflect your level of risk tolerance: aggressive (high tolerance for risk), moderate (medium risk tolerance) or conservative (low risk tolerance).