Investing is a good alternative to simply keeping money in the bank with little to no significant returns. There is a common misconception that investing is only for those who have the knowledge and time to constantly monitor the market. But how about the people who doesn’t have either? In this article, we are going to talk about mutual funds.
What are mutual funds?
A mutual fund is an investment fund that composes of pools of money from a number of investors. Mutual funds are used to purchase a portfolio of different securities. They are managed by a fund manager. The manager invests the fund’s capital and attempt to produce gains in behalf of the investors. The securities bought through the funds are called holdings, which, when combined form a portfolio.
Mutual funds are like baskets. All securities bought are put inside the basket. If the mutual funds are used to buy some shares of Company ABC, the investors do not directly them. Rather, they own a representation of the securities held in the basket.
Unlike in stocks, shares bought from mutual funds do not give its holders any voting rights. Income from dividend stocks and interests are often sent to the fund owners in the form of a distribution. Fund owners have the choice to receive these through checks or reinvest them to get more shares.
Benefits of mutual funds
- Professional management – There are a lot of people who are interested in investing, but they do not have the time and knowledge to build their own portfolio. Mutual funds are managed by professionals who do the analysis and decisions in order to maximize profits from the invested capital.
- Portfolio diversification – This is considered as one of the best ways to avoid the high risks in investing. However, diversification is hard to achieve, especially if the investor doesn’t have a huge amount of money to start with. Mutual funds make diversification easier to achieve since the money from investors are combined to accumulate bigger funds that can purchase investments across a number of diverse assets.
- Affordability – Most mutual funds require a relatively low initial deposit. Sometimes even with as low as $100, investors already have the chance to invest in a number of securities that are held by the funds.
- Convenience – Mutual funds allow investors to cash out their shares at any time at their current net asset value or NAV plus any redemption fees. Although unlike normal stocks, mutual fund redemptions take place only at the end of each trading day.
- Transparency – Even though mutual funds are managed by a different person, investors have the rights to review all transactions made through their accounts to ensure fairness and accountability.
Read more about the importance of financial investing.
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