A mutual fund is a pool of money managed by a group of professionals or investment advisors. The advisors will take the money from a large number of investors and invest it in various bonds, stocks, security or other short term assets. The collective holding of the fund is known as a portfolio.
It is usually too challenging for the individual investor be become an expert on the various companies and industries to invest in such as steel, telephone conglomerates etc., so it is important for them to depend on the knowledge of a professional investor who does the research and makes the best decisions for how to invest the monies. The mangers of the mutual fund will investigate the prospects of many companies before they select the ones to put in the fund.
Once everything is compiled, investors can purchase shares of the fund much in the same way they would purchase shares of an individual company. The shares will rise and fall in value much in the same manner as well. Most mutual funds require only moderate minimum investments, usually as low as a few hundred dollars up to a few thousand dollars. This allows investors to put together a diversified portfolio a lot more inexpensively than if they tried to do it on their own.
The expenses that the professionals incur while putting together the mutual funds are covered by the fee that is charged when one buys or sells shares of a mutual fund. Though these fees may be small, it’s important to carefully research how much a particular mutual fund costs and determine how much it will cost you over time if you plan on investing in it. For example, if you find two identical mutual funds but there is a fee difference, you will want to select the fund with the lower fee or lower annual cost.
When researching mutual funds it is important to note that past performance is usually not a reliable indication of how a fund will perform in the future. A mutual fund that had huge returns last year may sink to a new low the following year. It is however important to evaluate a funds past performance in order to assess its volatility over time. A fund that ranks very highly over a period of time rarely finishes at the top later on. The most important thing is to look at the long term results and trends. While it may be tempting to dump a low performing fund, keep in mind that it’s not uncommon for them to have an off year. Check the comparable funds and see whether or not it trailed them for more than a couple of years. If it hasn’t it’s better to sit tight.
Should you invest in mutual funds? Well, you must understand that any sort of investment will always carry a certain amount of risk, so it is recommended that you always consult with a financial professional before committing any money to a mutual fund.