A mutual fund is a group of people pooling money together to buy a range of stocks and the money is administered by a manager.
Depending on the type of fund, the gains received will likely be moderate but consistent. In addition, using mutual funds to diversify your portfolio will help you spread your risk. When you spread your risk your chances of losing money are greatly diminished. This is the principle behind mutual funds.
Why Invest in Mutual Funds
If you have $20,000 you may choose to put half of the money into one stock and the other $10,000 into another stock. You do not have money to buy lots of different stocks. If either, or both, the stocks happen to go down in value then it is likely you will not make money.
In a mutual fund there may be a 100 people with $20,000. This gives the fund buying power of $2 million. The manager has enough money to buy stocks in different companies and spread risk.
Mutual funds all have a particular strategy of investment. The mutual fund manager cannot buy any stock they wish when they feel like it. There has to be set criteria that the manager follows and this criteria is always outlined in the fund prospectus. This is so you can make an informed choice about the types of stock your money goes to.
Mutual Fund Strategies
Strategies that define mutual funds come in all shapes and sizes. A mutual fund may only invest in technology stocks, or in banking stocks, or in large corporations, or emerging markets, or in any sphere you can imagine. Within the strategy there will be further guidelines that manager must follow when buying stock. As an example, the largest holding in any company cannot be more than 2% of the fund. Rules like this ensure that the funds portfolio is properly diversified.
Mutual funds cannot be ignored as a method of investing. Mutual funds take up a large portion of the investment market with as much money placed in mutual funds as in direct stocks.
Information is for educational and informational purposes only and is not be interpreted as financial advice. This does not represent a recommendation to buy, sell, or hold any security. Please consult your financial advisor.