Mutual funds are exactly what they sound like, funds that are made possible by using multiple parties to fuel investments. Rather than having one portfolio for a single investor, mutual funds are basically a portfolio made up of numerous investors. These types of funds can invest in stocks, bonds, etc.
How a Mutual Fund Works
Basically, a mutual fund is powered by a group of investors that have made the commitment to invest in a single portfolio together. The type of investments that are embraced with a mutual fund will determine what type it is. The most classic example is a mutual fund that invests internationally by buying stocks of international companies would be considered an international mutual fund.
Simply put, this is a great form of investment for those who don’t have cash lying around where they could make a lot (100 or more) investments to make their portfolio diverse. Instead, brokers and researchers come together to manage mutual funds and it provides a variety most wouldn’t be able to embrace if they were investing solely on their own.
The Benefits of Mutual Funds
You might be wondering what makes this approach different from taking the time to manage your own portfolio, so the benefits listed below will help shed some light on the subject.
· Embrace a lower cost for ongoing management.
Brokerage fees and transaction fees are just a couple of the types of expenses that are accrued if one were to build their own portfolio. However, when you invest in a mutual fund, these costs are cut down significantly.
· No knowledge of economics is needed to see a positive outcome.
This is because mutual funds are professionally managed so there is no need for you to understand how the stock market works or how many other types of investment works. If you tried to do this on your own without a mutual fund, you’d have to learn about these things.
· You can invest a lot less than other types of investment required at the beginning.
There is a lot of variety when it comes to the types of mutual funds that you can invest in. For example, one mutual fund might invest in only cash, stocks, and bonds while another might invest in precious metals.
Combine the benefits above with the fact that you can set up a system to automatically invest into the fund on a regular basis, and you have one of the most powerful ways to invest at your disposal. While mutual funds are popular ways to invest for retirement, they can be used for other applications as well.