What is a Mutual Fund?

Written by: Mike Valles

One of the options that are available for investing your money is called mutual funds. What is a mutual fund? A mutual fund is a number of stocks, bonds, and short-term debt tied together for investment purposes, and is packaged in a portfolio.

Multiple Investment Products Helps Ensure Safer Choice

Having a bunch of stocks and bonds, and money market instruments, all tied together creates a safer environment for investing, says Investor.gov. Because your money is dispersed to various stocks and bonds, it provides a hedge against losses that may be caused by one or two lower performing instruments than if all your money were tied up into one stock – and it failed.

More Investment Tools Available in Mutual Funds

Many of the investment tools are often not available to the investor who only has a small amount of money to invest, says Investopedia. Putting your money into mutual funds enables anyone to take advantage of the power of the combined tools, which should also give them a safer way to invest.

Mutual Funds Are Directed by Fund Managers

A mutual fund company will have a fund manager in charge of selecting the various tools in the portfolio that the company invests in. The manager continually does the research into the investment tools to ensure that their company can give you a good return on your money. There are different portfolios, but the fund manager selects which stocks and bonds, etc. will go into each portfolio.

It is important to keep an eye on your mutual fund portfolio, especially if there has been a change in fund managers, says Smart401k.com. This is because one fund manager may manage the fund better than another one. It is the job of a fund manager to keep an eye on how well the various items in the company’s portfolio are performing, and to remove the underperformers and to add top performers so that the stocks ideally are among the best.

Mutual Funds Come with Different Levels of Risk

When choosing a mutual fund, it is selected based on a certain level of risk. The funds that will earn the most are those that also have the highest level of risk. People that are closer to retirement should not choose a high risk mutual fund because of the greater potential for loss – which could seriously affect their retirement.

In the article mentioned above by Investor.gov, they note that the past performance of a mutual fund may or may not be a good indicator of how well it will do in the future. How one has performed in the past is not a guarantee that it will do so in the future.

Mutual Funds Have Different Fees Attached

Mutual funds have to be purchased through various brokers and mutual fund agencies licensed to sell them. Because of this, there are different fees that are attached to them, says Forbes.com, and this includes commissions – which may be front-ended or back-ended, redemption fees – if the fund is turned over before a specified time period, operational costs, and more.

When asking, what is a mutual fund?, it is important to know that it currently is a popular form of investing. Not all your investment money, however, should be put in one place – especially these days.


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What is a Mutual Fund?

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