Are you thinking of investing in mutual funds? These low-risk investments offer a way to pool your money with other investors to purchase shares of bonds, stocks, or other securities that could be difficult to do by yourself. Mutual funds are normally overseen by a portfolio manager who does not invest in the fund. The cost of a mutual fund, which is also called net asset value, is determined by the total dollar value of the securities in that particular portfolio divided by the number of outstanding shares. The price will fluctuate based on the value of the securities held at the end of the business day.
Keep in mind that the investors don’t own the securities the fund invests in, but they own the shares in the mutual fund. A decision to buy or sell the securities is made by the portfolio manager, who is backed by a team of researchers. The portfolio manager’s goal is to invest in such a way as to outperform its benchmark, also referred to as a widely followed index. The best way to tell if the fund manager is performing well is to look at the three- to five-year returns because the short term won’t provide much useful information. Understanding how the funds work will help explain the benefits of investing in mutual funds.
Mutual funds are great starting points for first-time investors. The minimum purchase can be as little as $100 to $2,500. Minimums can also be waived or lowered if the investors buy a fund in a retirement account or by using automatic investments features to invest regularly. It’s a good way to diversify your investments, so your money isn’t all in one place, which is smart. You’ll gain the added benefit of having a professional manager running the show that has the expertise and current technological resources at their disposal. For people that don’t have the time or experience to manage their investments, a mutual fund is perfect.
Another benefit is the convenience of buying or selling your fund shares at the close of the market for the fund’s net asset value once a day. Your income can be automatically reinvested or make additional investments whenever you’d like. It makes your income more accessible and investments more fluid. You can save money investing with volume discounts. For example, if you purchase one soda, it’s more expensive per soda than buying a 12-pack. It’s the same with investing; you would pay more by purchasing one security at a time than mutual funds investing that reduce transaction costs for the investors.
Let’s go back to diversity as a benefit because this is a significant advantage of mutual fund investing. Mutual funds have a broad market exposure because just one mutual fund can invest in many different investment securities. Something one fund just cannot do. Diversification with your investment money is a smart way to start investing, and it helps to build your investment portfolio. Mutual funds are thought of as safer investments. While all investing comes with risks, mutual funds are on the lower end of the risk scale. Many investors started with mutual funds investing, and then use some profits to invest in riskier investments. It’s a way to spread your money out to work the best for your investments over time. Mixing low-risk investments with higher risk investments can bring about a sizeable return.