If you are looking to build your savings – perhaps for retirement, it is smart to invest. One investment type that is popular is a mutual fund; let’s take a closer look.
A mutual fund is type of investment that is comprised of a pool of funds that has been obtained from several investors for the sole purpose of investing it in different securities such as bonds, money market, stocks, and other similar assets.
Mutual fund shares cannot be purchased on the stock exchange or from other investors; they can only be purchased directly from the fund company or from a broker. Mutual fund shares are typically traded at the end of the trading day, when the net asset value is calculated.
The net asset value (NAV) is the amount of money that is takes to purchase a single share of a mutual fund. It is different from a stock in the way that it cannot be calculated in real time (by the hour), and also in the way it is calculated. NAV is calculated using the assets which are the investments and also the liabilities: Net Asset Value = (Assets – Liabilities) ÷ Shares of Mutual Fund.
Mutual funds are popular with people that want to invest for many reasons.
- Mutual funds are a fairly easy and a relatively affordable way to build a diverse portfolio. When you purchase a share of a mutual fund, you are able to spread out your total risk over a wide range of investments in different sectors and markets. It is also important to diversify when you are investing, so you never have all of your eggs into one basket.
- Typically you find that mutual funds are run by professionals, who have extreme knowledge of the markets – more than the average investor. They are able to properly judge the different investments and the profit potential.
- Mutual funds are pretty liquid meaning you are able to purchase or sell shares as you please.
- Depending on what your goals are, there is a mutual fund that fits your wants/needs. From those that offer slower, steadier growth, to high-risk, high-reward stock funds – there is something for everyone.
- You don’t need a large initial investment to get started, or to own a particular fund.
As with any type of investment, there some down sides to mutual funds.
- There are some swings in the market, so there are price fluctuations with mutual funds.
- You may make money or you may lose money, there are no guaranteed returns with mutual funds – mutual funds are not insured.
- There are annual operating costs, and the taxes and fees can lower any return.
- You don’t pick the investments in a mutual fund, and don’t have influence over which securities the fund manager buys and sells.