A mutual fund is an investment vehicle that pools money belonging to many people to invest in a variety stocks, bonds or other securities. Mutual funds are managed by professionals who make the investment decisions for the fund with the goal of increasing the overall fund value. As the assets in the fund rise in value, your share of the fund (typically measured in “units”) will also increase in value. If the value of the fund’s assets decreases, so will the value of your units. Each fund has a written investment goal that helps you decide whether it should have a place in your overall financial plan.
What are the benefits of mutual funds?
- Professional management – When you invest in a mutual fund, you get the benefit of the fund manager’s extensive experience and deep research capabilities in terms of selecting investments. Fund managers also have the ability to invest in securities not available to the general public and can create portfolios that investors would not be able to put together on their own, and they manage the buy-and-sell decisions so you don’t have to.
- Diversification and economies of scale – Diversification means spreading out your investments over several kinds of asset categories, geographic markets and investment styles, so a poor showing in any one asset or country won’t damage your entire portfolio. Mutual funds are a simple way to help diversify your portfolio, because they invest in a group of stocks, bonds or other securities selected by a professional fund manager. When you buy units of a mutual fund, you’re pooling your money with other investors. So, if you’re a small investor, you’re able to own a much wider mix of investments than you would likely be able to afford by yourself.