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.
How Do I Select a Mutual Fund? This is where you’ll want to laser focus your attention and become an amateur sleuth while doing your research. The number of mutual funds available to investors right now rivals the number of stocks on the North American exchanges. Each one of these funds is unique but can be categorized based on the type of underlying securities held within it. At the broadest level, a fund falls into one of three categories: equity (which is stocks), fixed income (which are bonds), and money markets (similar to cash).
Investing in mutual funds can be a smart move for almost any kind of investor. Beginning investors and professional money managers, and every experience degree of investor in between, can take advantage of the features and benefits of mutual funds and apply them to their investment objectives. There are many qualities of mutual funds to learn but fortunately investing in them is much easier than making a list of the advantages! With that said, and in no particular order, here are six advantages of investing in mutual funds.
The Basics of Mutual Fund Taxation
Since most investors are buying mutual funds for the long-term, and most are moderate investors that want to take some risk to get higher returns (but not a high level of risk) we’ll focus on building a portfolio for this investment objective (long-term, medium risk). Here are some of the best funds to start a long-term portfolio: