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Lower Investing Risk: Strongpoints and Investment Guide of Mutual Fund

As we all know, investment means both benifits and risks. To reduce risk is the most important thing for investors. If you want to buy funds as part of your investment, mutual fund should be the best choice.

Mutual Fund Investing Guide

Mutual Fund Investing Guide

A mutual fund is pooled money of thousands of individuals that is invested in different types of securities. When you buy shares in a mutual fund you are actually buying shares of an investment company. That company assets are stock, bonds, certificates of deposits, etc.

If you want to start investing without taking large risk, and if you are low on the money in the same time and don’t want to pay large brokerage commissions and fees, mutual fund might be the right thing for you. You can start investing with as little as $50!

Mutual funds began in the US in 1924, and by 1970 they held only 57 million in assets. Today mutual funds account for well over four billion dollars under management, with more than 11,000 mutual funds, offered by over 600 different companies.

So what is so special about mutual fund. Simply, it isĀ  diversification. I have already talked elsewhere on the website of the importance of diversification. By diversifying you will substantially lower the risk. However, in order to diversify in stock market you will need a lot of money to invest. For example, you will have to buy shares of 10 different companies, preferably not from the same industry, to substantially lower the risk of loss if something unexpected happens with one of the companies, or ever more than one. Well, diversification is exactly what mutual fund does for you. And takes it even further as mutual fund can consist of different types of securities, not only stocks. For 75% of mutual fund, no single security can be greater than 5%. However, the rest 25% can consist of only one. So what you do is buy shares of mutual fund, where mutual fund already consist of many different securities such as stocks, money market funds, bonds, sometimes even real estate, etc. So basically, you can buy only one share of a mutual fund, and have an advantage of diversification. What diversification gives you is higher return for a given rate of risk.

Another good thing about mutual fund is that you can buy it and pretty much forget about it, as mutual fund is managed by professionals, who always work looking for the best investments. You will always get detailed reports about the mutual fund and you will always know how your investment is doing. On average, mutual fund have return of around 12%. This definitely beats other returns such as bank saving account, etc.

Opening a mutual fund account is a fairly easy job, especially if you do it online. Just check out different companies that offer them, do some research, and start investing. I avoid giving an actual advice, of where you should invest your money. The final decision has to be yours, therefore keep reading and researching, and get yourself educated before investing into a mutual fund.

There are several very important things that you need to consider before you start.

First, you need to decide for how long you will own the mutual fund. Then you need to decide how much risk are you willing to take, and finally which category of mutual fund suits you the best.

When evaluating a mutual fund, you should check it’s performance over the past 3,5,10 years, and so on, to be aware of how the mutual fund performed in the different market environments.

Also, make sure that you read the prospectus of the mutual fund you might be interested in. In prospectus, you will be able to learn many things about the mutual fund, such as the investing objectives of the mutual fund, and the type of securities that fund invests in. Also, fees will be listed there, so it is very important for you to carefully read it. All additional expenses will also be listed, as will fund’s performance over the past years.

After you have read the prospectus, continue your research by comparing the fund with other similar funds, check if it’s performance has been steady, and also, if the expenses associated with the fund do not exceed expenses of the other funds. However, if the fund with greater expenses is outperforming funds with lower expenses, then investing in fund with greater expenses is still a better thing to do.

Evaluate the risk. Never forget that risk is closely related with the return. The more risk you take, the return should be bigger. Do not invest in mutual funds with high risk, if return is not equally higher than the return of other funds with less risk.

There are two types of mutual funds. Load funds and No-Load funds. Load funds usually involves a sales charge.
Keep in mind that just because a fund has a load, it does not guarantee a good performance. There are many no-load mutual funds that are great performers, and equally there are many load mutual funds that are great performers.



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