The reason why diversification is important is that investing in just one or two securities can be too risky. For example, if an investor buys just a few stocks and those stocks see significant declines in price over a short period of time, the investor’s portfolio can drop dramatically in value. But if the investor buys a mutual fund that holds 100 stocks, and a few of those stocks see price declines, the impact on the investor’s account value is less.
Start your research with one of the best no-load mutual fund companies, such as Vanguard, Fidelity, and T. Rowe Price. No-load mutual funds don’t have sales charges, called loads, which can be as high as 5.75% of the purchase. Therefore, when buying no-load funds, you’re buying shares without paying loads. Also, these mutual fund companies offer many different mutual funds with low expenses, which are measured by an expense ratio. For example, many of Vanguard’s funds have expenses below 0.30%, which is $30 for every $10,000 invested, whereas average expenses for most mutual funds are above 1% or three times that of Vanguard’s.
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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.
Opening an Account to Buy Mutual Funds. If you don’t already have an investment account at a brokerage firm or mutual fund company, you’ll need to open one before you’re ready to make your first purchase. Opening an account doesn’t require money; all you need to do is choose the company where you’ll invest and follow their procedures.
However mutual funds can be significantly less expensive. A mutual fund manager will place all the necessary trades to maintain the mutual fund portfolio but the investor may only be responsible for one low expense. But if investors are not careful, investing in mutual funds can be more expensive than buying individual stock securities. To keep costs low, mutual fund investors are wise to buy no-load mutual funds with low expense ratios. Costs can also be minimized by investing with one of the best no-load mutual fund companies like Vanguard, Fidelity or T. Rowe Price, all of which have a diverse selection of no-load funds with low expense ratios.