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What Are Mutual Funds?

By Edited Jun 21, 2016 2 1
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The entire purpose behind any kind of investment is to make your money grow. It's the whole reason you put your spare cash into a savings account; so it can earn interest rather than just sitting in a box under your bed. With so many different kinds of investments out there, though, it's hard to decide on a particular vehicle. Do you put your money in the sidecar of the stock market motorcycle? Do you instead go for the long, slow bus of a C.D.? Perhaps the old-fashioned horse caravan of government bonds? These are all valid options that will get your money from Point A to Point B, but for investors with a small seed they want to grow into a sizable, respectable nest egg mutual funds are one of the most popular options.

Check out this article if you want to learn about investing in the Forex market.

Or take a look at this article if you would like to learn about investing with an Individual Retirement Account (IRA).

What Are Mutual Funds?

The easiest way to explain mutual funds is to compare them to a betting pool. Say there's a game going on, but you only have $5 to put down on it. That's not very much to lose, but it also won't yield you much if you win. If you get together with a bunch of friends though, and you all pool your spare cash then you can put down a much bigger bet than any of you could make individually. This gives you a bigger investment to make, and if you win you can split the pot according to how much each person put in.

That's sort of how mutual funds work, except without all the fancy jargon and investing terms.

Put another way, a mutual fund is a pooled investment where all investors contribute, and the fund manager invests the pool. The funds in the pool may be used to purchase government bonds, stocks, securities, and a number of other investment vehicles, and the profits made on all of those are divided equally among all who invested according to how much they invested.

Why Invest In Mutual Funds?

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Investors who already have hundreds of thousands of dollars in financial leverage don't, strictly speaking, need to invest in mutual funds. If you want to be able to make big investments without a big lever though, these funds allow you to throw your weight in with a lot of other small investors so that, combined, you can all do something pretty big.

Despite their obvious appeal though these funds aren't a guaranteed investment. It's entirely possible the person managing the fund buys stocks that plummet, or buys bonds that turn to lead overnight. It's just as important to check the performance history and content of a fund as it would be to research a company before buying stock in it. If a mutual fund has a solid performance history though, and it looks like it would be a fertile place to plant your seed then there's no reason not to use it to grow a money tree.

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Comments

Feb 15, 2015 10:13am
Millsy36
This past year I started investing in mutual funds for the first time. It's a great way to invest money in companies if you can only afford to make small regular payments.
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Bibliography

  1. "Mutual Funds." Investopedia. 22/01/2015 <Web >
  2. "What is a Mutual Fund?." About Money. 22/01/2015 <Web >

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