Investing is often seen as part of a wider financial plan that allows a person’s money to grow. New investors may not be familiar with all aspects of investing, however, and it is important that they do their research so that they have a solid grasp of where they are putting their money and how the process works. A common method of investing is to place money in mutual funds, which means that it is important that investors understand what a mutual fund is and how it operates.
Simply put, mutual funds are investment strategies in which an investor combines his/her money with other investors to buy stocks, bonds, or other securities that are difficult to purchase as an individual because of the large monetary commitment.
An individual investor can invest in mutual funds with as little as $100, although the average initial investment is usually around $2,500. Minimum investment amounts are sometimes waived or reduced if funds are bought within a retirement account or if brokerage features such as automatic investments are utilized. While investors do not own the securities that the fund invests in, they do own shares in the fund.
An investor’s collection of stocks, bonds, and other securities is known as a portfolio. Mutual fund portfolios are professionally run by portfolio managers who, along with researchers, make choices regarding which securities to buy and sell on a daily basis.
Most mutual funds contain over 100 securities, so having professional fund managers is a necessary component. The primary goal of managers is to choose securities that will outperform established benchmarks over a long-term period, thus yielding impressive returns.
There are many benefits to investing in mutual funds. The relatively low monetary entrance fee allows investors with small sums of money to begin investing. Buying shares in mutual funds offers a way for investors to diversify their holdings and spread their wealth around.
Professional portfolio managers with skill and expertise manage the mutual funds, thus eliminating the need for investors to micromanage all aspects of their funds. Investors can buy or sell fund shares once a day, which is convenient for those who like to move their money around a bit.
Ultimately, the most significant benefit of mutual funds is their ability to earn money for investors over time.