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Mutual Fund – Understanding the Basics

If you are considering investing your discretionary income in the stock market, you have likely heard the term “mutual fund.” Below is an overview of mutual fund investing.

Investing is Risky

No matter how “low risk” an investment claims to be, it is important that you understand all investments carry some degree of risk. Even taking a posture of not investing at all is its own form of “preservation investing.”

With that in mind, mutual funds historically to have much lower risks than many other investment options – an attribute that makes them particularly attractive to people who are new to investing or who simply want to get their feet wet in the stock market while keeping their investments as risk-free as possible.

Beside being an ideal safety investment option, a mutual fund can be a great alternative to a traditional savings account.

This is because, in addition to their low degree of risk, they generally offer substantially better return rates than a standard savings account – making them (usually) a great way to secure your financial future.

Mutual Fund Basics

In a nutshell, a mutual fund is simply a collection of bonds and stocks owned by a group of people rather than a single investor.

Because of the way they are set up, these funds allow investors to buy for a much lower investment than it would cost them to purchase an identical portfolio of investments on their own – and it spreads potential losses among a group of people should the fund go south.

Advantages and Disadvantages

Like any investment, there are several advantages and disadvantages associated with purchasing mutual funds. First, you generally won’t see dramatic fluctuations in a typical fund – this is because they are largely selected for stability.

Of course, while mutual funds are generally not going to generate massive gains, some funds are quite a bit more aggressive (and risky) than others. The risk associated with them you choose is completely dependent on the level of risk you are willing to take with your cash.

Diversify your Portfolio

Mutual funds are a great way to help you diversify your portfolio – although the manner in which they are used depends on your financial needs. If, for example, you have decades until your planned retirement, you might consider a riskier fund because if it doesn’t go well, you have many more years to recover before leaving the workforce. On the other hand, if you are only a few years away from retirement, you should probably opt for more stable funds.

Types of Funds

There are three basic types of mutual funds, with a few variations on each. First are money market funds, which are ideal for long term investors who are willing to leave their funds in an interest bearing account and allow it to accumulate.

Next you have equity funds, which provide slow growth over their life as well as some income along the way. Finally, there are fixed income funds, which designed to ensure the investor is able to maintain a current standard of living.

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