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A mutual fund is an investment vehicle in which your investment dollars are pooled with those of other investors and spread over various securities within the fund. Mutual funds are available to the small investor as well as those with large amounts of capital. A common method of mutual fund investing for the average person is through a 401 (k) retirement program at work. Mutual funds offer investors a number of advantages.
Spreading the Risk
When you invest in a mutual fund, you’re actually investing in a variety of securities within the fund. A professional money manager moves your money, as well as that of the other fund investors, among the different securities as economic conditions change. When you invest in a single stock or bond, on the other hand, you run the risk of losing your money if that one security fails to perform.
According to the Mutual Fund Education Alliance, a portfolio of 50 individual stocks would require $100,000 in investment capital plus broker commissions. When you purchase a mutual fund, you are also diversifying your money among a large number of securities, but you can start with as little as $1,000 or less. If you purchase a no-load fund, you won’t have to pay any sales commissions.
Mutual funds are liquid assets, meaning you can withdraw your money quickly if the need arises. In many cases, it’s simply a matter of picking up the telephone and calling the fund’s customer service line to initiate the transaction. You may be able to have the money deposited into your bank account in two or three days.
Most mutual funds allow you to access information via the telephone or Internet 24 hours a day. This helps you to keep close tabs on your fund’s performance. You can even set up an automatic investment plan where a specified amount that you choose is deducted from your bank account on a specific day of each month, which makes investing easy.
There are mutual funds available for virtually every type of investment want or need. For example, you can choose a fund that invests solely in foreign companies or in specific industries. You can also select a fund that best suits your risk tolerance, ranging from the very conservative to the extremely risky. This gives investors the ultimate freedom of choice.