What Are Mutual Funds And How Do They Work?

Have you ever wondered; what are mutual funds and how do they work? You hear about mutual funds all the time on TV, radio and in the newspaper. Many of your friends and family have talked about their mutual fund investments, and you know you should probably invest in some yourself but you just don’t know how. Many times mutual funds for beginners can be intimidating so the following information provides some basic aspects on mutual funds that should help you in answering this question.

Mutual Funds are a single investment that consists of a collection of stocks, bonds, or other securities. These securities are put together in a way that achieves a specific investment objective such as high dividends and high returns, or a specific type of company such as technology stocks or environmentally friendly companies.

Investors are attracted to these because buying a share of each of these companies would cost too much to do by yourself, but collectively (with other mutual fund investors) is made possible. Funds are also relatively easy to buy, you can do so with your local broker or an online investing company with very little effort. You may even be able to purchase mutual funds through the company you work for in your company’s retirement plan.

Investors make money from owning mutual funds in a few different ways. They could benefit from the included stocks paying dividends, the securities could increase in value (capital gains) or the fund could become desirable to the market and appreciate in value on its own.

Pros to Buying Mutual Funds

Any investor that owns mutual funds can sell their collection at anytime and turn them into cash. They don’t bring as much money as other types of investments, due to the large amounts of them being sold on a regular basis, but it is a form of income nonetheless.

Owning mutual funds also has a lot less risk, since the securities contained are spread out and very diverse. By making many different investments, if one is a loss, it doesn’t drag the others down with it. You can easily still make money with the rest of the collection of mutual funds.

Cons to Buying Mutual Funds

Some mutual funds can charge lot of fees, many of which may be “hidden”, and can ultimately decrease the amount of profits you make with them.

Another disadvantage is that if you have a fund that is too diverse, gains will be a lot less when the economy is strong. This dilution is due to the advantage of having a low risk investment.

Are mutual funds right for you? Only you and your financial planner can answer that question but there are certainly a lot of benefits and types of mutual funds available for you to choose one that fits in your portfolio.

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