What Is A Mutual Fund: 10 Advantages You Must Know

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what is a mutual fund

What is a mutual fund?

A Mutual fund is a convenient way to invest.  It is simply buying and selling of mutual shares  wherein you get professional management for your money. Unlike other more permanent investments such as buying a car or a house, you can quickly exchange mutual funds in cash or transfer funds to buy another investment.

The idea is to buy shares when the costs are low, and sell them when the cost of the shares you own goes up. Although this investment is not 100% risk-free, there are a lot of advantages when investing in mutual funds that you must know to get the best out of your investment.

For you to understand clearly what s mutual funds, here are the top 10 advantages you must be aware of:

1. Professionally Managed

There is always the possibility of losing money on some bad investments as most of the time,e invest by trial and error. But with mutual funds you are assured that the managers and analysts handling your account are researching and analyzing current and potential holdings for the best interest of their mutual funds.

2. Low Minimums

Some mutual funds require a $10,000 initial outlay to invest. But there are also some that require a minimum amount ($1,000 initial investment) for one to become a shareholder. You can also do this with no initial investment at all. How? By allowing the mutual fund company to take $50 or $100 a month directly out of your bank account as your regular investment.

what is a mutual fund

3. Safety of Investing

The safety of an investment is a major concern of every shareholder. Although there will always be risks involve, investing in mutual funds is safer than other investments. These funds are highly regulated by the Securities and Exchange Commission under the Investment Company Act.  A custodian bank holds all fund’s assets for safekeeping. In case a mutual fund company goes out of business, all its investors are assured to get their respective shares.

4. Variety of mutual funds

There is a wide variety of mutual funds to choose from. You can invest in stock funds, balanced funds, bond funds, money market mutual funds, sector funds, and target-date mutual funds. Each of these funds have their own advantages and disadvantages, so it is wise to study what each one has to offer before actually investing.

5. Diversification

You can easily diversify your portfolio because you have access to hundreds of individual stocks or bonds that you can buy. But doing this individually can be costly. When you purchase mutual funds, instant diversification is done with the asset allocation given at a lower cost.

6. Liquidity

When you talk about liquidity, it simply means faster turn around of buying and selling your investment. You can easily sell your mutual funds and get the money from your shares the very next day. However, you should also be aware of extra fees for such transactions. Mutual funds allow withdrawals once a day and is only available after calculating the fund’s net asset value (NAV).

7. Transparency

You can easily look up mutual fund holdings online and compare the top companies for investment. You can also check on the progress and cost of your shares.

8. Automatic reinvestment

Mutual funds also offer automatic reinvestment whenever you have capital gains and dividends at no extra charge. This means the capital gains produced by the mutual fund would be used to automatically buy more shares instead of giving the money to the investors.

9. Audited Track Records

Most companies maintain an audited track record for each mutual fund to assure its investors of the possible returns on their investment. All mutual fund track records should be GIPS (Global Investment Performance Standards) compliant.

10. Systematic Investing and Withdrawals with Mutual Funds

Money can be pulled directly from your bank account and invested in a mutual fund on a monthly basis. Many companies allow an investment of a low as $50 per month. There are no fees for withdrawal and deposits for a mutual fund.

Investing in a mutual fund can be a great way to increase your hard earned money.  Reading and learning more about this system of investment, being aware of the possible risks and the possible gains of getting into a mutual fund can help you increase your chances of financial success.

Reading this article will certainly help you understand what is mutual funds and why is it better to invest in one.

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