Mutual funds offer an excellent way to make some money in the stock market without being subject to the roller-coaster ups and downs which can result from buying stock in only a few companies. Mutual funds also relieve you of the need to become an expert stock trader, because they are guided by the knowledge of a professional fund manager.
A mutual fund is one single investment product you can buy shares in, which is made up of a carefully-chosen collection of stocks in many different companies. Some funds also contain bonds and other kinds of investments as well as stocks, and each fund has been assembled by someone with expert knowledge. The components of a mutual fund are chosen carefully to balance each other out, so that you have the best possible chance of seeing some profit from your investment. Because the stock market bounces around quite a bit from week to week, it’s usually a good idea to plan to keep your money in a mutual fund for at least three years. Most of the stocks in the mutual fund will gain in value over the long term. Mutual funds have managers who carefully watch the behavior of each component in the fund, and use their expertise to decide about buying and selling these individual stocks in order to keep the whole fund on a good path.
Mutual funds come in a whole range of different types and categories – far more than we can cover in this short overview. If you love learning about the world of investing, you can become deeply knowledgeable about the world of mutual funds. For starters, you can learn how to use a free mutual fund screener such as the one offered by Morningstar.
Alternatively, you can spend a bit of money consulting a financial advisor who doesn’t represent a particular fund. He or she will give you objective information about good funds to buy. The main characteristics that investors use to compare different funds are:
Their fees: Some funds charge you a fee every time you add more money, others charge a bit every month; there are many different kinds of fee structures. Some funds are much more expensive than others, so be sure to find out about your costs before deciding to invest.
Their risk level: Even though mutual funds are intended to provide a cushion against risk, some funds are actually created for very adventurous investors who are willing to take bigger chances in hopes of seeing higher returns.
Their focus: If you feel especially passionate about socially responsible investing, or alternative energy, for example, you can find funds which strive to serve these goals while also making a profit.
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