The benefits of mutual fundsA mutual fund pools money from many investors who share the same investment objective as the fund. Mutual funds give everyday investors a variety of investment opportunities. For people who don’t have the knowledge, time or money to create a portfolio of individual securities, mutual funds offer important benefits.
Professional managementInvestors benefit from the knowledge and experience of professional investment managers who are dedicated to security analysis, evaluation and selection.
LiquidityInvestors have immediate access to their money by selling shares at the fund’s net asset value, which is determined at the end of each trading day. The fund's net asset value will fluctuate each day so that an investor's shares, when redeemed, may be worth more or less than their original cost.
DiversificationNot "putting all your eggs in one basket" is an important way to limit risk. Because mutual funds generally invest in a wide range of securities, like stocks and bonds, they provide immediate diversification. And because mutual funds are sold in shares, no matter how much you invest, you own a proportionate amount of all the fund‘s holdings.
SimplicityCustody, tax reporting and record-keeping are among the many services mutual fund companies provide in a highly cost-effective manner. Many also provide investors with a wide array of shareholder services, including quarterly reports, duplicate statements, fund performance updates and extended hours during tax season.
Study the routeThere are over 10,000 mutual funds available to investors! If you’re new to investing, you might feel overwhelmed. But don’t worry—most mutual funds can be classified into three broad categories according to the type of financial assets they hold. These categories offer different levels of investment risk. A good guideline: the higher the risk, the higher the potential return, and the lower the risk, the lower the potential return.
Money Market FundA mutual fund whose portfolio is made up of short-term (usually 90 days or less), low risk securities, such as commercial paper (i.e., short-term corporate IOUs) or certificates of deposit. Because they are low risk, they tend to offer lower returns.
Bond FundA mutual fund whose portfolio is made up of mostly fixed-income securities (i.e., bonds). While there are various types of bond funds, most offer low to moderate levels of both risk and return.
Stock FundA mutual fund whose portfolio is made up of mostly stocks. In exchange for higher risk, the fund’s objective is usually geared towards earning higher returns. Because stock and bond funds are more sophisticated and harder to understand, this guide will focus on explaining these types of funds.