If you're looking to invest in the stock market, but prefer taking a hands-off approach, mutual funds might be a good option. It can be a great investment vehicle for beginners, or for those who simply don't have the time to actively manage their investments.
As defined by Investopedia, a mutual fund is "an investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money managers, who invest the fund's capital and attempt to produce capital gains and income for the fund's investors."
A key advantage to a mutual fund is that it offers an investor instant diversification. When you invest in a mutual fund, you're investing with a group of other people, and all that money is pooled and then used to buy stocks and bonds across the market. While this does mean that you potentially wouldn't make as much money if you had chosen certain stocks yourself, you do protect yourself from some risk. Mutual funds are meant to be long-term investments, one that emphasizes slow and steady growth. And it's also a lot cheaper to buy into a mutual fund than it would be if you invested in 10-20 separate companies, since you're not paying as many fees and commission charges.
There are a large number of mutual funds out there, including index funds, actively managed funds, target date funds (retirement funds), and business sector funds.. It is highly recommended that you talk with a financial advisor about which type of mutual fund is best for you, based on your objectives, willingness to take risk, and the timeline you're envisioning.
Some other things you should consider regarding mutual funds:
- Costs. Mutual funds usually come with fees, some of which are paid up front while others are paid over time.
- Performance. Depending on the type of mutual fund you pick, some are higher risk than others.
- Minimum initial investment. Most mutual funds require an initial investment of some kind.
- Investment style. You can tailor the type of mutual fund to match your investing strategy. For example, does a mutual fund focus on the technology industry? Is it a conservative or an aggressive fund? Are there a high number of bonds in the fund, or commodities?
Once you've talked to your financial advisor about your goals, feel free to use this chart below, courtesy of FindtheBest.com, to search for a mutual fund that meets your needs.