Investing your hard earned money can be intimidating and confusing at times. Stocks? Bonds? ETFs? Mutual Funds? Index Funds? Which one is right for you? Let’s keep it simple in this article and stick to just mutual funds.
What is a mutual fund you ask? Simply put, a mutual fund is a basket of investments. Each of these baskets holds dozens or hundreds of security types such as stocks, bonds, cash and/or other assets. The underlying securities within a mutual fund are called holdings, which combine together to make up one mutual fund. The design of mutual funds allows investors to pool their money together into one professionally managed investment. It is important to understand that you as an investor do not actually own the underlying securities--the holdings--but rather a representation of those securities; investors own shares of the mutual fund, not shares of the holdings. As an example, if a particular fund owns Amazon stock among its holdings, you as an investor in this mutual fund do not directly own Amazon stock, but shares of the mutual fund.
The advantages of owning mutual funds can be summed up with three words; simplicity, diversity, and accessibility.
Simplicity: The average investor does not have the time, resources or knowledge to manage their own portfolio of stocks and bonds. Buying a mutual fund gives you, the investor, the ability to own a professionally managed, diversified portfolio with little to no knowledge of investment strategies and concepts.
Diversity: We’ve all heard the saying “Don’t put all your eggs in one basket” before. This is where the diversification of mutual funds comes into play. If you wanted to diversify yourself with your own stock portfolio, you would have to own a number of individual stocks and be able to keep on top of everything that is going on with each of those stocks. Purchasing a mutual fund offers diversification with just one security, at least when getting started. As you become more comfortable you can add additional mutual funds to your portfolio to further diversify.
Accessibility: Your road to investing can get started with as little as $500 with mutual funds. This brings us back to the simplicity of mutual funds. You do not need a lot to get yourself started!
There are thousands of mutual funds but they can be divided into a few basic types. The two primary types of mutual funds are stock funds and bond funds. Many like to invest in index funds, which often have hundreds of holdings and offer investors the greatest features of mutual funds -- simplicity, diversity and low-cost.
So now that you know what a mutual fund is, and how easy it is to start investing, what are you waiting for?
Disclaimer: The information in this article is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.