Mutual funds are a managed investment service that collects together the money of many investors like you to purchase a specific set of securities. They’re suited for people who want to participate in the stock market but minimise the time spent on buy/sell decisions about certain stocks.
When you buy a share of a mutual fund, you are getting a slice of the profits they get from their investment decisions. They’re managed by financial professionals, although whether this is a good thing or not is debatable.
Buying a share in a mutual fund is a good way to diversify your investment portfolio since the mutual fund will often buy a wide range of assets.
There are many different kinds of mutual funds:
- Equity mutual funds invest in stocks.
- Fixed-income mutual funds invest in bonds.
- Index mutual funds invest in a whole index like S&P 500.
- Country mutual funds invest only the securities in a single country.
- Growth stock mutual funds invest in growth stocks instead of stocks in large established companies. Watch out for the turnover ratio.
Picking a Mutual Fund
The prospectus gives information about how the fund operates, its fees, performance data, etc.