Jul 27, 2010

What is a Mutual Fund? (Carole)

Sometimes we hear financial terms (maybe even use them ourselves) and yet don't really know what they mean.  Maybe the term Mutual Fund falls into this category for you.  I'm going to try explain what a Mutual Fund is in less than 200 words.  Here we go. . .

*A Mutual Fund is a pool of money (millions and millions of dollars) from thousands of investors.  Get it?  You are all mutually funding this huge investment vehicle. 

*These millions and millions of dollars are used to buy DIFFERENT types of stocks (or possibly bonds) within this one Mutual Fund.  Your Mutual Fund can own stocks from stores, high tech companies, oil companies, banks. . .whatever businesses out there are selling stocks.  

*These diverse stocks are carefully chosen by a Fund Manager.  His or her job is to choose wisely and broadly so that if one segment of the financial world (say, the price of oil) goes down, chances are that a different segment of the financial world (say, the value of Wal-Mart stock) goes up.  The Fund Manager's needs to make sure you own both kinds of stock, so your investment money is safe -- and hopefully earning interest.  Actually their job is to make sure you own dozens of different kinds of stocks that can balance one another out, which greatly reduces your risk.  With this kind of diversity, the chance that you will lose all of the money you (or any of the investors) have put into the fund, are very very small.  

That's it.  That's all a Mutual Fund is.  You can purchase Mutual Funds that specialize in a particular philosophy or segment of society:  Green Products and Technology,  International Companies, U.S. only based companies, Christian Principles or just about any niche you can imagine.  Mutual Funds are also divided into categories based on how risky the stocks are that the Fund owns.   Your investor can help you determine how much of a gambler you really are as you choose your Mutual Funds.

The reason most small investors like Mutual Funds, is because they allow you to have a very diverse portfolio of investments with very little money invested.  If you had $2,000 invested on your own in the stock market, you could probably only afford to buy a few stocks in a couple of companies.  But in a Mutual Fund you will own parts of hundreds or thousands of different stocks.

Mutual Funds tend to be a much safer way to invest your hard-earned $$.


TheMoncurs said...

I have the book "Mutual Funds for Dummies" and it's a really good resource if you're wanting to learn more before investing!

Mary Frances said...

I've been reading your blog for a couple of months, and I just wanted to let you know how much I enjoy it, and how much I appreciate all your advice. My grandfather was an economics professor, so I grew up hearing about mutual funds, Roth IRAs, and investment strategies, but I don't think he ever explained them so lucidly as you do on your blog - so bravo, and thank you!

Packrat said...

Carole is correct. Mutual funds are much safer than many other types of investing, but when the market falls you can still lose money on your investment. Never invest more than you can afford to lose, and try not to panic when the fund loses. When the economy rebounds, so should your investment.