What are Mutual Funds? The Basics

So, it's time to start investing is it, time to put away some dollars for the future? If you answer that with a Yes, then you probably have another question, "What are mutual funds?"

Mutual funds allow us to invest, to participate in the stock, bond, or money markets, or in some combination of those three. The money we invest or contribute is pooled with the contributions of thousands of others, and a manager at the mutual fund company uses that pool of money to buy into those markets on our behalf.

We and the thousands of others who participate in the funds share the costs of research, diversification, brokerage fees, and management fees. It costs a great deal of money to hire someone to research, buy, and sell in these markets, so we can get into them with far less capital than we otherwise would. You can literally start with just a few dollars a month.

Next, we should ask, what are mutual funds in less abstract terms. In that case, mutual funds are individual groupings of stocks, bonds, cash, or some combination of these three. Most mutual fund companies have a range of funds, to provide their investors with choices.

Behind most classifications of mutual funds lies what might be called a risk profile. How likely is it I will lose money if I invest in this fund? Very conservative funds generally invest in just money market funds; they're not likely to lose you any money or sleep, but they won't make you much richer either. Turning 180 degrees, we find stock, or equity, funds. These invest solely in stocks of corporations, and carry more risk. But, they also have greater potential for high returns. So, you'll always have to face tradeoffs, between potential risks and potential rewards.

Let's again ask, what are mutual funds? in the context of getting money back. After all, if we've invested wisely, we can expect to get more back than we put in. That profit, the difference between what we put in and what we get back, comes from capital gains, dividends, and interest that have flowed into the fund. Capital gains means selling share for more than we paid, dividends meaning a share in corporate profits, and interest meaning the rent we received for the use of our money.

Finally, the question: What are mutual funds? gets us to the point of noting that mutual funds provide us with an inexpensive and relatively easy entry into investing. However, there are lots of bumps on that road, so your first investment should be in yourself. Invest your effort and time in knowing and understanding mutual funds, to ensure you find success sooner.

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Next, it's time to look at the subject of mutual funds performance - that's what we really want to know about once we've started investing in a mutual fund. Visit mutualfundsperformance1.com/>">mutualfundsperformance1.com to learn about the performance characteristics of mutual funds.

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