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Mutual FundsWhat are mutual funds and why are mutual funds good investment vehicles?Mutual funds are a type of investment that centers around the stock market. When you buy shares in a mutual fund, you are actually buying stocks that are listed on the stock market and stock exchanges. The difference is that a mutual fund allows you to buy a piece of many different stocks from a wide range of companies all at one time instead of forcing you to take the time to buy stock in each company individually. This creates a very favorable situation for any investor; diversification. Diversification and the importance of mutual fundsWhen you diversify your portfolio, what you are doing is spreading the investment risks over a large section of the stock market. If you follow the history of the stock market as a whole, you will find that the stock market tends to grow on average between eight and ten percent per year. What this means is that if you could own one share of stock in every company on the stock market, you would realize an average gain of around ten percent per year over time. Of course the great majority of us don't have the capital or time available to own a share of every company. Mutual funds own shares from many companies, often over 100 different companies, so when you invest in a mutual fund your return is spread out over a wide range. This way, if one or two companies do very poorly, the other companies can take up the slack. That is what diversification is in a nutshell. And that is what make mutual funds such a favorable investment vehicle. I strongly suggest investigating mutual funds if you are considering jumping into the investment markets. Investigating mutual fundsJust like any investment, it pays to do your homework when it comes time to find the mutual fund, or series of mutual funds, that is right for you. Of course past performance is never a 100% indicator of what will happen in the future, but there are many areas you can look at to determine the possible return on investment of a mutual fund. The first thing I look at is the management of the mutual fund. How long has the current management been in place and has it been stable for an extended period of time? If a mutual fund has consistently returned ten percent over the last five years, but has just changed managers, you need to find out why there was a change and find out the new managers past track record. On the other hand, if the manager has been with the mutual fund for a long time and has shown consistent results, it is a good indication. Of course you want to check the performance of the fund for the past five years at least, and you would prefer ten years of data, but what many people fail to look at is how the mutual fund did in comparison to the overall market. In other words, if the market performed at ten percent as a whole, where was the mutual fund. You need to look at this information every year. The last area I will mention is the composition of the fund. Mutual funds that have too many stocks from a single market segment, like technology or energy (as examples only, nothing wrong with these industries), you will be at the mercy of the market if something happens to the entire segment. If you decide to invest in many mutual funds, you can eliminate much of this risk, as you will be diversified just about as much as you can. The more diversified your portfolio is, the better chance you have to profit from the overall gains of the market. As always, the information contained here is just my opinion. You should not make investment decisions based on my opinions. Seek out information on your own and consider talking to a professional investment broker.
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