Mutual funds can be structured in several different ways, including open-ended mutual funds vs. closed mutual funds being one particularly important distinction. To learn more about the way mutual funds are organized, you’ll want to read How a Mutual Fund Is Structured. You may also want to delve into Making Money from Mutual Funds, which explains how investors actually profit (or experience losses) from owning a stake in a mutual fund.
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.
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Mutual Funds Are Diversified Investments. The nature of mutual funds as pooled investments that are professionally managed means that investors generally can easily accomplish one of the most important standards of smart investing — diversification. To diversify means to spread market risk by holding a variety of several different securities, rather than just a few. Most mutual funds invest in dozens or hundreds of stocks or bonds within one portfolio. Depending upon the type of fund, this accomplishes the fundamentals of diversification with as little as one or two mutual funds. However, when building a portfolio of mutual funds, especially as investment assets and objectives grow more complex over time, investors are smart to diversify across several funds in different categories.
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.
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.