Mutual Funds

Mutual Funds

A mutual fund is a type of investment vehicle where investors pool their money in order to allow each investor participate in a portfolio of securities. The individual investor doesn't actually own each security but instead, he owns shares of the mutual fund. The main benefit of a mutual fund is that it provides a way for the investor to achieve diversification in his investments without having to invest a a lot of money.

The first mutual fund was the Massachusetts Investors Trust introduced in 1924. At the end of it's first year, the fund had 200 investors with $63,600 in assets. At the end of 1995, the fund grew to 73,500 investors with assets totalling $1.8 billion! Now there are over 7000 different mutual funds available for you to choose from.

You may be wondering why you should choose a mutual fund. Simple - a mutual fund offers 2 large benefits over owning the stocks individually. Those benefits are diversification with professional management without having to invest a lot of money.

Diversification is important because it helps to reduce the risk. By owning shares of multiple
companies, the fund's share value is not devastated if an individual company has a poor performance.

Selecting which securities to buy, the allocation of cash and securities, and when to purchase is all done by the fund manager or the management team. The fund manager has the training, time and the resources to make the best informed investment decisions.

Also, he fund may be part of a family of funds where the investor can switch between funds at no additional cost, including switching in and out of a money market funds. Most mutual funds include some degree of check writing privileges and may offer automatic transfer of funds on a periodic basis like monthly for those who want to regularly invest a set dollar amount. This type of investment is called dollar cost averaging.