Written by Charlotte Wood (last updated February 21, 2009)
Mutual funds are just another type of investment that you can consider when looking into investing your money. However you may ask: what exactly is a mutual fund? How do they work? What are the risks? How do I invest in mutual funds? A brief overview of mutual funds can give you the quick facts you need to decide whether or not a mutual fund is the right type of investment for you.
When you purchase a mutual fund, you're allowing someone else to invest that money for you, whether that be in stocks, bonds, currencies, futures, money markets, or options. This is a benefit for many because actual investing is time consuming and often overwhelming, so allowing someone else to do that for you can take a huge load off your concerns. Benefits of mutual funds other than having someone professional handle your investments include creating a diversified portfolio for your investments and greater accessibility to the different investment markets.
The risks with mutual funds however are similar to risks with any other kind of investment: you risk your money, the fulfillment of your investment, and the actual value of your investment which is dependent on the market.
When choosing a mutual fund there are a few things to consider, the first of which being your objective in investing. Why do you want to save? Are you saving for retirement, education for your children, or money for inheritances? Once you know the reasons for why you're saving, then you can better make a decision as to what kind of mutual fund you should purchase. With an equity fund, you buy interest in a corporation and this type traditionally carries with it more risk and higher potential return. Income funds on the other hand are more secure and are usually for either maintaining a healthy principal or for more actively accruing financial gain (the latter indicates higher risk). However, most income funds carry significantly less risk than equity funds.
Really what you need to decide what category of mutual fund best fits what you want and what you're willing to risk. After you determine those personal needs and goals, you need to go to a mutual fund agency and they can help you from there determine exactly what kind of mutual fund you should invest in.
Mutual funds may be a bit more confusing than other investments, but once the basics are understood, it will be easier to determine what you want and remember to keep in mind that mutual funds can be great ways to save for big events in your life and the lives of your children.
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