Maybe you’ve heard the term “mutual funds” tossed around and wondered whether you should be in them. Or perhaps you’re curious about these financial instruments because the money in your savings account just doesn’t seem to be working hard enough for you and you’re looking for an alternative.
Whatever the reason, it makes sense to consider the mutual fund for several reasons, so we’ll cover them here. Then you can make an informed decision for yourself.
What is a mutual fund?
A mutual fund is an investment vehicle that pools money from a group of investors and invests it into a group of securities. These securities can be any number of things, such as stocks, bonds, other mutual funds, short-term money market instruments, or sometimes even commodities sold in the marketplace like steel, paper, wool, or precious metals. The money in the mutual fund is managed by a team of professionals who follow the rules of the Securities and Exchange Commission, and who try to achieve the objectives of that particular mutual fund.
Why consider a mutual fund?
Ok, so let’s talk about why you might want to put your money into mutual funds. Here is a list of what advantages mutual funds have over keeping your money in, say, a typical savings account or stuffing it into your sock drawer.
Mutual funds are diverse.
Unlike trying to pick specific stocks or putting all your money into a bond fund or a savings account, a mutual fund invests your money into a big pot. That pot includes lots of different companies, often across varying industries, sometimes across different countries. That means if one company’s stock goes down, another one may go up at the same time, thereby protecting your investment. That’s the beauty of diversification.
Mutual funds are managed by professionals.
You pay a fee to have your money managed by a team of professionals who understands key indicators and warning signals in the marketplace. These professionals are not perfect, but the assumption is that they have more time and expertise than a typical layperson to make decisions that will earn good returns on your investment.
Mutual fund accounts let you start small, are easy to use and flexible.
With most mutual funds, you are allowed to start with a relatively small initial deposit. Then, you can set up automatic transfers from your regular checking account. That way you can set it and forget it! Or, if you’re like me and you like to nose around in your accounts to see how they’re doing, you can do that too.
Mutual funds offer choice.
Most mutual fund management companies (these are often banks or other financial institutions) offer a great selection of mutual funds for you to invest in. You can match these to your financial risk profile (i.e. are you comfortable with the possibility of losing a decent chunk of change in exchange for the possibility of earning great returns – or would you rather play it safer and have lesser returns?), your sense of ethics, your preference for domestic or foreign investments, and so on.
Mutual funds offer the potential for good returns on your investment.
As you may have experienced, interest rates at banks are low right now. But because mutual funds take on more risk (the investments are not insured by the FDIC, like your deposits in a savings account at most banks are), the potential for much higher returns are there. In researching returns on mutual funds for this article, I saw 1-year returns in the range of anywhere between 6% to 39% on any given mutual fund.
If you ask me, that’s a lot better than those nice-smelling sachets, which is pretty much the best thing I ever find in my sock drawer. Even if they do sometimes smell like lavender.
Oh, and I also found this little video called – wait for it – “How Mutual Funds Work.” I thought it might be a helpful addition to the above to fill in any lingering gaps.
So check it out, decide for yourself and good luck!
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