One way for many people to invest in the stock and bond markets is through mutual funds. These are pools of money from several investors who have a similar goal, such as capital appreciation or high current income. The money is invested by a professional manager into a group of securities, known as a portfolio.
Although they have risk and aren’t for everyone, mutual funds are the choice of many people who have long-term investment goals. One key reason is that mutual funds use professional management. Many people lack the time or expertise to keep up with changes in the market. The portfolio manager has the knowledge to figure out what to buy and what to sell.
Mutual funds are also diversified. The combined assets of hundreds or thousands of investors allow the portfolio manager to buy a range of different securities that fit the investment objective of the fund. This can spread out the risk of the portfolio because different securities will perform better at different times. Diversification won’t eliminate all risk, of course, but it may help.
To help you keep track of your investments, mutual fund companies provide regular reports on your investments. These will help you track your performance and make life a little easier at income-tax time, rather than having numerous separate securities to monitor.
There’s another reason that mutual funds are popular with many investors: Many funds have low minimum investment requirements. That makes them affordable to many different types of investors and allows you to make regular investments rather than a large lump-sum payment.
Investing involves risk, including potential for loss.
Diversification and asset allocation do not assure a profit or protect against loss. Foreign investments involve greater risks than U.S. investments, including political and economic risks and the risk of currency fluctuations. Bonds are subject to interest rate risk and may decline in value due to an increase in interest rates. The S&P 500® Index tracks the common stock performance of 500 large U.S. companies.
