A mutual fund is exactly as the name implies, a fund held by many different people. The funds consist of specific named types of investments such as stocks, bonds or money market instruments. No one person owns any particular stock, bond or money market instrument in the fund, each person own shares in the total value of the fund.
Mutual funds are one means of diversifying your investments. Instead of putting all your money into a particular stock, bond or other investment vehicle, you spread out your investment among many different ones. If one of them doesn’t do well, the other one potentially can offset the poor return and make the fund money. While you won’t make a million dollars by diversifying your investment, you won’t lose all your money either.The original source sit mutual funds.
While many large investors use funds, people with less money also save investing in funds. Most funds allow you to invest as little as $25 dollars a month as long as it is an automatic withdrawal from your checking or savings each month. While it doesn’t seem like much money, the money you save investing this way go into the mutual fund on a dollar cost averaging basis and it doesn’t take long before you’ve accumulated a substantial amount.
Dollar cost averaging, mentioned previously, is another method of adding safety to your investment. Some people try to time the market, meaning they try to buy at the lowest point and sell at the highest. While the idea sounds simple, most people fail miserably at this. By investing in a mutual fund on a regular basis, your average price is normally lower than if you risked your entire bankroll hoping to time your purchase right.
There are all types of mutual funds. Some funds are a specific sector of the market such as financial stocks; others are balanced funds that contain both stocks and bonds. When you purchase mutual funds, it’s best to use the services of a financial consultant to help you find the best ones to purchase to meet your goals.
Utilizing asset allocation, a consultant can help you to choose several funds that meet your needs. Rather than using one mutual fund, the advisor will help you spread the risk into a blend of funds that can weather any financial storm. A mutual fund may be a stock fund, but it also can be a specific type of stock fund. For instance, the mutual fund could contain large cap growth stocks. Large cap simply means that the mutual fund holds stocks with a large amount of capitalization, in other words, large companies. Instead of returning profits to the stockholders in the form of a dividend, as a value stock might, they invest the money they make for more growth in the company.
Once you decide what percentage of funds to put into each mutual fund, rebalancing the money you save investing in mutual funds is also important. Normally, when value stocks are doing well, growth stocks aren’t. If large cap stocks are sitting idle, small cap stocks, smaller companies, are booming. After a while, your funds no longer contain the same balance you had originally. On a specific time basis, you always balance back to your original investment percentages. You do this by selling off the high funds and purchasing the lower producing funds to realign your portfolio. In doing this, you’re always selling high and buying low.