Mutual Funds pool the money of many investors in order to buy the stocks and/or bonds of many different companies. When you invest through a mutual fund, you get a stake in everything the fund invests in. This can be a lower-risk alternative to buying stocks individually.
- Investing in mutual funds can be a lower-risk way to invest in stocks thanks to diversification. With one stock, your risk is concentrated in one company. A mutual fund, in contrast, may hold dozens (even hundreds) of stocks, bonds and money-market instruments. This means one stock declining will likely have little effect on the overall value of your investment. For beginning investors, this can be a good way to invest in stocks, since it reduces your odds of making a bad investment. Choose mutual funds if you feel uncertain about investing in stocks individually, or if you don’t have sufficient time for researching and managing a portfolio.
- Be aware of mutual fund fees. Mutual funds are managed by professional investors. This is an advantage, since you benefit when a professional makes investments on your behalf. This comes with a price, however. Mutual funds charge management fees amounting to as much as 3% of your portfolio value each year. Look for a mutual fund that charges one percent or less. They’re not hard to find.