Mutual Funds. You have heard of them right? But maybe you don't know what they are, or what to do with them or how to pick one? Breathe a sigh or relief because I'm going to explain a little bit about them. I will not be giving specific suggestions, as I am not professionally qualified to tell you where to invest your money.
According to Investopedia.com, a mutual fund is a pool of funds collected by many investors for the purpose of investing in securities. Securities can be stocks, bonds or other assets. To make it even more simple, it is similar to my family, your family, and your neighbors family all putting some cash together to go out and buy a little stock in McDonald's, some of Taco Bell, and maybe a little of Walmart. Together we are shareholders of this fund we have created. When the prices of these stocks we purchased increase are investment increases, the opposite is true when the prices go down.
The nice thing about owning a mutual fund of stocks is that you are not putting all your money into one company. The mutual fund may be invested in hundreds or thousands of different companies. Some do well, some do average, a few do poorly. Lucky for you, you didn't put all your money into that one stock that did poorly. Spreading your investments over many companies reduces your risk of losing your investment.
Maybe that is what concerns you about investing in mutual funds. It seems risky. It seems like you could lose your money. While that is true, it is not the norm. First you should not be investing in anything risky if you are going to need that money soon. Soon in my opinion is five years or more. If you have money to put away for retirement that is 10, 20, even 30 or 40 years away then a mutual fund is not very risky. You have time on your side. You have time to recoup any losses you might incur. And technically, you can only really lose that money if you sell the investment. If you hold on to it for the time period I mentioned, you are likely to see the value of your investment fluctuate, but it isn't a real loss or gain until you cash the investment out.
When you purchase a mutual fund, you are purchasing shares. You shares will never decrease unless you sell them. You will see your shares increase when you buy more shares, and if your fund company passes earnings from those stocks back to you in the form of dividends and capital gains. Dividends are kind of like interest, but different.
The value of each share you own in the mutual fund will change every day the market is open. On the days the share value is up, value of your total shares are also up. And that is exciting! On the days that shares are lower than before, the value of your account will also be down. Of course, not a big deal if you didn't sell anything that day. You still have those same shares. Now if you bought shares of your mutual fund on a day when the share price fell, it simply means those shares were on sale. We like a sale right? A sale on shares allows you to buy more shares with the same dollar amount.
Don't be afraid of the fluctuating value of your mutual fund investment. Yes, there is some risk, but generally those who don't take on some risk do not reap the the rewards. I hope you feel a little better about what a mutual fund is and maybe a little more open to investing in them.