Investing Basics: What are Mutual Funds? (video)

Summary of video: Investing Basics: What are Mutual Funds? Mutual funds are the easy way to invest because for a very low cost investors can own a share of an extremely diverse portfolio of stock, or bonds, or both. You pay an annual fee for the fund management (and smart investors find index funds where this is very low). One way that investors make money is if the stocks in the fund appreciate. The second way is through a dividend payment. Transcript of Investing Basics: What are Mutual Funds? A mutual fund is a collective investment that pools together the money of a large number of investors to purchase a variety of securities—like stocks or bonds. When you purchase a share in a mutual fund you have a small stake of all investments included in that fund. Think of a mutual funds like a basket of investments. When you purchase a share in a mutual fund you are buying one share of this basket, and therefore have a stake in one small fraction of all the investments in that fund. Mutual funds can benefit investors in several ways. They are simple way to make a diversified investment. Most are managed by a financial professional. And because of the wide variety of mutual funds, they allow investors to participate in a wide variety of investments. Let’s walk through an example of how a mutual fund works. Suppose there’s an investor who wants to invest some of his retirement portfolio in the stock market, but he doesn’t have time to analyze individual stocks and create a diversified stock portfolio. Instead, he decided he’d rather purchase a mutual fund. This way, the investor can purchase a single investment which will, in effect, be similar to purchasing an entire portfolio of stocks. Which mutual fund is right? But which mutual fund is right for him? To find the right one, he uses online tools such as mutual fund searches and ratings given by independent third party organizations, to find a mutual fund that meet his investing goals. Once he finds a fund that looks like a good fit, he reviews the fund’s prospectus, which is the official summary and explanation of how the fund operates. The prospectus provides a wide variety of information about the fund including its fees and charges, minimum investment amounts, performance history, risks and other useful information. After researching the fund and its prospectus, our investor decides that this fund looks like a good investment so he pays the minimum investment amount and purchases one share of the mutual fund. By owning a share, the investor now participates in the gains and losses of all companies held in the fund. The benefit of this is diversification, which is when an investment or portfolio is spread across several different investments. Doing this helps lower risk. For example, if one company that the fund invests in has a rough year, the impact on the fund’s total assets can be small because that […]

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