Many retirement investment accounts are invested into mutual funds. Investors who don’t want to research stocks and other investments also choose mutual funds as their best investments choice, too, because it’s easiest. Just because everyone else seems to invest in mutual funds, doesn’t mean they are common knowledge. Don’t invest in anything you don’t understand.
What is a mutual fund? A mutual fund is when a bunch of people pool their money together and invest it in a bunch of other investments such as stocks, bonds, commodities, etc. The total fund is broken up into shares that can be purchased. A fund manager is assigned to each fund and is in charge of choosing which investments to put the money into.
Some funds are geared toward conservative investments, others are more aggressive, and then there are a bunch in between. Typically the more conservative funds include a higher amount of bonds and aggressive funds include more stocks. Some only contain one.
Index mutual funds include the stocks that are included in an index such as the S&P 500 or the Dow Jones Industrial Average. These are an approximate average of the stock market and therefore return about what the stock market returns as a whole. It’s a popular choice among investors.
Choosing a fund requires taking the time to look at the fund, research its history, and find out what is in store for it. Just because it returned 10% averaged over the last 5 years doesn’t mean it will in the future. It is like any other investment in that it is unpredictable. That is why it is important never to make assumptions with investments when you’re choosing what to buy.
Should you invest in mutual funds? If you want a well-diversified portfolio and you don’t want to spend time researching and analyzing corporations, mutual funds are a great choice. They are also good for retirement investing and discretionary portfolios.