When it comes to investing your money for retirement, mutual funds are, more times than not, the way to go. If you have read a number of personal finance articles, you might notice that writers continually talk about these funds. Still, they often fail to explain the basic premise behind mutual funds; so many investors have a limited idea of what they are.
Before you can fully understand mutual funds, you have to have a basic knowledge of stocks, bonds, and other important terms. Though these are simplistic explanations of these important terms, they will suffice for the sake of understanding.
Stocks are interesting because they give you the opportunity to hold shares in a company’s ownership. Companies that offer stocks are often referred to as “public” companies because their ownership is comprised of many public entities. If you want some examples of these companies, you might look at Pepsi, Microsoft, or even IBM. Stocks are extremely popular as the most traded bit of ownership that is traded on the open market.
With bonds, you aren’t directly investing your money into a public company. Instead, you are lending your own money to the government for their personal use over a length of time. With this type of investment, you will get not only the principal investment back, but also a set amount of interest. Rates for this type of investment are smaller, but these are safer investments.
Other than stocks and bonds, there are plenty of other types of investments that people have to consider. As mentioned before, mutual funds are popular among investors that like a safe option. They are popular for those people who don’t have a great idea of how to direct their own investment portfolio.
The basic definition of a mutual is somewhat simplistic, but it should do the trick in helping you understand their primary purpose. A mutual fund allows a bunch of investors to use their investment dollars together to achieve the desired objective. There will be one person in charge of directing the fund, who is known as the fund manager. He will make the choice of deciding which specific stocks and bonds to invest in within the mutual fund niche. Mutual fund investors actually hold shares in the mutual fund itself, as opposed to being individual shareholders of the different stocks.
Most investors like mutual funds because of the fact that they are extremely efficient investments. In fact, they are some of the easiest things to invest in. You are basically allowing someone else to direct this portion of your portfolio, but that person will be an experienced, skilled financial mind. Historically, mutual funds have been some of the safest investment options on the market, as they are specifically designed to fit the needs of safe minded investors.
When compared to stocks and bonds, mutual funds are a safe, effective way to invest money. As the market as become so volatile in recent years, it is important to have a portfolio that includes both these safe options and other riskier investment packages.