What are Mutual Funds?

Think of a mutual fund as an investment company that pools the money of people just like you for one common reason - to make more. Each mutual fund has its own strategy and investment objective for making money.

The Advantage

Mutual funds are one of the best investments ever created because they are very cost efficient and very easy to invest in (you don't have to figure out which stocks or bonds to buy).

By pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. But the biggest advantage to mutual funds is diversification.

Diversification

Diversification is the idea of spreading out your money across many different types of investments. When one investment is down another might be up. Choosing to diversify your investment holdings reduces your risk tremendously.

The most basic level of diversification is to buy multiple stocks rather than just one stock. Mutual funds are set up to buy many stocks (even hundreds).

The goal of the Mutual Fund

The goal of a mutual fund is to provide an efficient way for an individual to make money. There are several thousand mutual funds with different investment strategies and goals to choose from. Choosing one can be overwhelming, even though it need not be. Different mutual funds have different risks, which differ because of the fund's goals, fund manager, and investment styles. Money from a mutual fund is made when the stocks, bonds, or other securities increase in value (a capital gain), issue dividends or make interest payments.

Workbook Example Mutual Funds - Major Fund Types / Categories Growth funds - A stock fund structured to appreciate over time. Income funds - Structured to provide regular income dividends to their investors. Balanced funds - Provide both current income and growth with a minimum of volatility. Market-Oriented funds - Classified by the market in which it chooses to invest, like stocks or by industry.

When investing in a mutual fund, the income you make is the result of income received from dividend paying stocks, and interest from bonds. If the fund sells a holding whose value has increased, you make money. Even if the fund does not sell that specific holding, the fund itself will still increase in value, and in that way you may also make money. Therefore the value of the shares you hold in the mutual fund will increase in value when the holdings increase in value.

To learn more about mutual funds, please contact Peter McNally, Certified Financial Planner at McNally Financial & Insurance Services.