The world of investment can be very intimidating and complex for a first-timer. However, it gets easier with the right approach and knowledge. One of the most popular and beginner-friendly investment options is mutual funds. In this article, we will comprehensively discuss what mutual funds are, how they work, their main goal, and how you can choose to invest in mutual funds.
What Are Mutual Funds?
Mutual funds, also known as managed funds or collective investment schemes, let you pool money with other investors who want to make the same kind of investments as you. Professional money managers run these funds and decide which assets to buy or sell. Most mutual funds are affiliated with larger investment companies such as Vanguard or Oppenheimer. Investing in a credible mutual fund could open you to diverse investment strategies and styles.
Main Goals of Mutual Funds
Before delving into how a mutual funds work, you should be aware that there are two primary goals of these funds:
- Building a diversified investment portfolio
- Maximize returns by managing the investment risk and minimizing it as much as possible
With these goals in mind, managers decide the type of fund and the right financial approach to proceed further with investments.
How Do Mutual Funds Work?
When you invest in a mutual fund, you buy ‘units’ in the fund. The fraction of units you own in the fund represents your share of the entire fund. The unit price on any given day is used to determine the value of your share. Consequently, the overall value of the fund fluctuates based on the performance of the underlying financial assets it holds. For example, if the value of a bond increases, so does the value of the mutual fund.
Once you’ve invested, your investment return is the difference in the unit price on the day you invest and withdraw. In more financial terms, this price of your share in a mutual fund is called net asset value or NAV and you can withdraw your funds based on the current NAV on your trading day.
Icing on the cake, you can withdraw your funds at any time that suits you. There’s often a minimum of $500 on lump-sum withdrawals, but you can get $50 to $100 weekly if you’d like. It would be wise to ask your fund manager for advice on a good time to withdraw unless you’re in a financial crunch and need money instantly.
How to Choose a Mutual Fund?
Once you know what you’re getting into with a mutual fund, the only daunting task is finding one that suits your financial needs and plans. A low-cost mutual fund is often a decent option for an absolute beginner. Experienced investors, on the other hand, can go for more risky options. The ultimate decision depends on the fund’s overall approach, whether it suits you, and the risk involved.
To wrap up, managed or mutual funds are a convenient and professionally managed way for amateur investors to start from scratch. These funds allow access to diversified financial portfolios and help minimize investment risk. Nevertheless, like any other investment, one must assess their risk tolerance and objectives before choosing a mutual fund. If you’re unsure, a financial advisor or fund manager can help you understand your long-term investment goals and provide personalized guidance on your investment strategy.