If you are exploring the investments world, then you must have heard success stories of novice investors who bought their own house at the age of 25 years solely because of investing in mutual funds. But what are mutual funds? How do mutual funds work? And why are mutual funds considered great for beginners?
Read on to find the answers in our dummies guide to mutual funds.
What are Mutual Funds?
The most basic definition of mutual funds is exactly what can be understood by considering the terms individually – i.e. they are ‘funds’ that are ‘mutual’ to different investors.
Therefore, it can be said that mutual funds are a type of crowdfunding where a large group of people invest their money in a single portfolio. Depending on the amount that they invest, each investor owns a share of the total mutual fund which represents their portion of holdings. (Note: Mutual funds must not be confused with stock investment because unlike mutual funds, buying a stock gives the investor ‘voting rights’ or a share in the ownership of the company)
How Do Mutual Funds Work?
Image title: How mutual funds work?
The working principle of mutual funds is that several investors come together to pool their money for investing in various securities such as stocks, bonds or other financial assets. A professional manager decides the best use of the gathered resources and then invests it accordingly. The return on investments is then divided amongst the group of investors depending on their original share in the mutual fund.
Advantages of Mutual Funds
Mutual funds are often called the best investment option for beginners because of the benefits associated with them. Here are some of the top advantages of mutual funds.
They are Beginner-Friendly
Making an investment in any organization and in any form requires an in-depth analysis of the industry, thorough understanding of the trends in the money market, and an overall extensive knowledge of finances. This is because to be able to make the most out of your investment; you must have a firm grasp on the technicalities involved in it. However, investing in mutual funds helps you bypass all the complexities because these funds are managed by the professionals who are skilled at what they do.
They Offer a Lot of Diversity
When it comes to investments, everyone knows that they must not put all their eggs in one basket. Mutual funds are extremely popular because of their diversity. You can buy different securities to spread the risk if any one or more of them do not end up giving the expected returns.
They are a Versatile Investment Option
Another advantage of mutual funds is that you can choose to invest in any industry that you prefer. For instance, investors can invest in sector funds that focus on certain market areas like healthcare, technology, social media and so on.
They are Easily Accessible
Did you know that you can start investing in a mutual fund with as little as $100 only? In addition to this, you also gain exposure to an entire market of securities as a single mutual fund can comprise numerous securities.
Mutual funds are perfect for novice investors because they are simple and easy to manage. However, remember that all that glitters is not gold. Despite their benefits, mutual funds also have certain drawbacks and limitations. So, seek proper counsel and research well before you begin.