Mutual Funds

Mutual funds are an excellent choice for those who wish to start investing but do not have large amounts of capital to work with, or who want to take a hands-off approach and let a professional make all the decisions. Mutual funds are basically large funds operated by investment companies, and pool money from many different people to then invest according to a certain goal for the fund. This allows for greater diversification than would be possible for a single person with less-than-generous assets, and also removes the burden of researching market conditions and constantly adjusting investments accordingly from the individual.

Types of mutual funds

Mutual funds usually invest in stocks, bonds, and depending on the conservativeness of the fund's goal, may also utilize investments like certificates of deposit, money market accounts, and so on.

Mutual funds are categorized by their goal: while some funds are designed to take risks in order to achieve the greatest potential growth, others are designed to maintain value while yet others invest heavily into dividend-yielding stocks in order to provide a source of income for mutual fund participants. While the individual investor must ultimately decide what his or her investment profile is, it is generally advised that younger investors take greater risks in order to attempt more dramatic growth, while older investors should invest more conservatively in order to protect their assets. Aggressive growth mutual funds are thus more popular with younger generations, and have a high level of risk with the potential for higher rates of growth. Asset allocation funds are designed to be as diverse as possible, having holdings in different asset classes and in different types of securities. Due to their diversity, asset allocation funds are usually lower-risk. Money market funds invest only in money markets, such as Treasury bills, certificates of deposit, and commercial paper. Money market funds are also low-risk, unlike capital appreciation funds which seek maximum growth by taking on very high levels of risk.

Yet other types of mutual funds are balanced funds, bond funds, international funds, growth funds, stock funds, sector funds, regional funds, and income funds. Each of these types of funds has a different goal and a different investment style, and any mutual fund manager will be able to explain the differences and advise investors on which most closely meets their needs.

Fees associated with mutual funds

Mutual funds are managed by mutual fund managers, and so there are always fees associated with investing into one. Brokers are paid by a sales load that is charged to the investors, which can be either front-end or back-end. A front-end load is paid when first investing into the fund, while a back-end load is paid when money is pulled out of the fund. There are also no-load mutual funds which instead of charging initial or closing fees, charge a variety of intermediary fees that may be collected on a regular basis throughout the investment cycle.

Mutual funds can be a convenient and hassle-free way for people to begin building an investment portfolio. Even accomplished investors with very diverse portfolios will often invest into several mutual funds as part of their investment strategy. Mutual funds offer a way to invest in as diversified or as narrow a field as desired, with minimal research being necessary on the individual's part.