What Is A Mutual Fund And Who Can Invest In Them?

by Hank

There are many investment vehicles that you as an individual cannot invest in. For example, some government bonds have a minimum limit of a million dollars as invested money. However, these same investments might have everything else that you are looking for – risk level, return and security against defaulting. If you want your money and other people’s money with similar investment objectives to join hands and investment in a place you could not alone, then mutual funds are your answer.

What is a mutual fund? A mutual fund uses pooled investments to invest money in investment securities (stocks, bonds, short-term money market instruments, other mutual funds, other securities, and/or commodities such as precious metals). The fund will have an objective that defines what the fund is all about. The fund could be about investing in the most secure places, or riskiest ones, or in a certain industry sector or in a particular instrument. The fund’s managers do all the work, while the investors receive the return on their investment minus the managers’ part.

Who can invest? So, basically, everyone can invest money into a mutual fund. Since the whole idea is to pool money, the minimum investment requirement is much lower with mutual funds. But the real question is: who should invest with mutual funds.

Where do the funds invest? Mutual funds serve a lot of purposes, be it investing in growth-based investments, bonds, money markets and other customized portfolios. Prospective investors should consider investing in one if they feel that these objectives are aligned with their own. For example, if you wanted to invest in the S&P 500 index then you invest with an index-based fund that does the work of changing investments according to changes in the index.

There are many advantages of investing in mutual funds. Some of them have been outlined above and an additional one is the fact that transaction costs are divided amongst all the shareholders of the fund as compared to one person bearing the cost. However, it is interesting to note that despite the fact the mutual funds usually use the service of professional investment managers who are much more qualified and experienced as compared to the ones managing smaller accounts, it has been recorded that index funds have outperformed most mutual funds in recent years. Mutual funds are not risk free, but they are great investment vehicles for your financial goals.

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