Mutual Funds

Mutual FundsMutual funds have become exceedingly popular over the last decade. Over 80 million people (half the households in America) invest in mutual funds. Despite how popular mutual funds are, many people dont know how they work. Many people know they buy mutual funds, but that is often the extent of their knowledge on the subject. If youre one of the many who arent sure how mutual funds work, get ready to learn.

In short, a mutual fund is a collection of stocks and bonds. The fund is split among investors, each owning individual shares that make up the entire fund. The mutual fund collects money from an abundance of investors and shareholders to construct a portfolio, typically consisting of real estate, stocks, cash, bonds, and other assets. In doing this, all investors and shareholders get to share in the profits of a larger charter.

Making money in a mutual fund may seem complicated, but its actually quite simple. Income is earned from the dividends on stocks and the interest on bonds. From there, the mutual fund pays out the income received to the shareholders. If the fund has capital gain (when it sells securities that have had an increase in price), theyre passed on to the investors. Also, if the holdings of the fund increase, you can sell your mutual fund for a profit. Typically, funds offer the choice to shareholders to reinvest with their profits if they so choose. This may sound complicated, but mutual funds are typically managed by a team of financial professionals. These professionals spend a vast amount of time researching assets, stocks, bonds, risks, and how to invest your money as wisely as possible.

There are many advantages to using a mutual fund as one of the ways you invest for retirement. The diversification in mutual funds allows for decreased risk with how you allocate and invest your funds. When you invest in a variety of assets, your potential losses from one asset are minimized by the gains from your other assets. The transaction costs involved with mutual funds are lower than the typical transaction cost due to the large amounts of buying and selling the mutual fund does at any given time. Mutual funds also give the convenience of liquidity; at any given time your shares can be converted into cash. Finally, one of the greatest advantages to mutual funds is their simplicity. Theyre easy to access, as virtually any bank offers access to buying into mutual funds. Additionally, the minimum investment is typically quite small, add in an automatic purchase plan and you can sit back and let your investment grow with minimum effort on your part.

Its not a shocking insight that there is an abundance of ways for you to invest for your future. When determining what is right for you, it is important to examine your risk, time, and what type of portfolio or investment is best for you. A mutual fund is an excellent way to plan for your future with reduced risk and the ease of simplicity.