Mutual Funds

Investing 101 – What is a Mutual Fund?

It’s not much of an exaggeration to say that mutual funds are the best thing for the middle class in America since sliced bread. They allow investors with small amounts of money to invest take benefit from the economic output of the U.S. economy in a way once reserved only for the wealthy.

Put simply, a mutual fund is nothing more than a public investment pool. You, along with thousands if not millions of other small investors with perhaps only a few hundred dollars to invest at a time, own an interest in an investment company that invests on your behalf, giving you access to the kind of sophisticated, professional money management that until a few decades ago was nearly impossible to come by unless you were already a millionaire. Needless to say, this is a major benefit to small investors everywhere and helped level the playing field between the lower, middle, and upper classes.

Mutual funds typically have stated investment objectives. For instance, some mutual funds invest only in large U.S. companies while others invest only in the stocks of foreign countries. Some invest only in small stocks while others invest in different asset classes entirely, such as bonds, real estate, and even commodities such as oil, sugar, and so on. Many experts say the mutual fund industry has gotten carried away by creating a different mutual fund for every tiny sector of the market imaginable, but others applaud such action as encouraging investors to take control of their own financial destiny.

Whichever side you fall on, there is no doubt that mutual funds belong in the portfolio of practically every investor, both large and small. Small investors benefit from being allowed to invest small amounts continuously over time, eventually resulting in substantial amounts of money in retirement. Large investors benefit from being able to easily and inexpensively delegate the responsibility of managing their finances to competent professionals, allowing them to sit back and enjoy the fruits of their labor rather than spending all day researching different investments.

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