When you invest in a mutual fund, your money is pooled together with other investors and a professional money manager decides when and how to invest your money. For investors who are just starting out, mutual funds offer a number of advantages, including low investment minimums, instant diversification and professional management.
Mutual funds typically invest in some combination of stocks, bonds and cash. Stock mutual funds tend to invest primarily in stocks. Bond mutual funds tend to invest primarily in bonds. Some mutual funds have the flexibility to invest in both stocks and bonds. Depending on their investment objectives, these mutual funds may be called balanced, asset allocation or target date funds.
Mutual funds are commonly used as the core foundation of many financial plans. For investors who may be saving for retirement, mutual funds provide a convenient way to save through automatic investment plans. If you’re approaching or currently enjoying retirement, mutual funds can help you plan for continued growth and income needs during your retirement years. And if you’re saving for college, mutual funds are often available in tax-advantaged college savings accounts.
Comparing Mutual Funds to Individual Securities
A mutual fund, which may invest in anywhere from 20 to 100 individual securities, typically offers a much higher level of diversification than investing in individual stocks and bonds on your own. In addition, you benefit from the services of a professional money manager, who has the time, resources and expertise to research and evaluate the potential investment return and risk of individual securities held in the portfolio.
However, there are some things to keep in mind about investing in mutual funds. With a mutual fund, you pay the fund’s manager a management fee every year. Management fees and operating expenses have the potential to detract from a fund’s overall performance. In addition, you have no control over when securities are bought and sold in the portfolio. If you own mutual funds in a taxable brokerage account, you are responsible for all potential tax liabilities that may be incurred by receiving payouts from the fund in the form of dividends and capital gains distributions.