Mutual funds offer an easy way for beginning investors to start investing in the stock market. Investing in mutual funds carries less risk than buying stocks directly. Investors can invest through a broker or through many online services which make investing easy and accessible. Investing in mutual funds delivers a higher rate of return than other investment vehicles such as CDs, bonds or traditional savings accounts.
Mutual funds come in all shapes and sizes. For the beginning investor, mutual funds are groups of stocks which are managed by a funds manager. The manager invests and sells the stocks that make up the fund. Funds are usually labeled as small, mid-cap or large. The designations pertain to the type of stocks that make up the fund portfolio. For example stocks in a mid-cap fund are from mid-size companies. There are also funds that are made up of technology stocks and funds that mirror the companies in the S&P 500 index. Unlike traditional stocks, mutual funds are not traded on the stock market. Instead of trading throughout the day they are priced and traded at the end of each day.
Mutual Fund Returns
The average return of investments in the stock market is 10 percent. This holds true for mutual funds as well because really they are just a collection of stocks. It is important to mention that this rate of return is an average based on a minimum 10 year investment. Mutual fund investing is not advisable for those looking for a quick gain, but history has shown that over time the stock market offers some of the best rates of return. Mutual funds have almost the same rate of return as directly investing in the stock market however the costs and fees of mutual funds may sometimes lower the rate of return.
Mutual Fund Fees
Mutual fund fees are called loads and are charged in different ways. They can be front, back, level or no load. The fees are payment to the broker for the sale of the fund. No load funds are those which charge no fees but also do not offer any advice. Mutual funds also have fees for managing the fund. These fees vary between 0.25 percent to over 2.5 percent. When calculating the fund return, it is important to include the fees.
Why Mutual Funds are a Good Investment
Mutual fund portfolios are made up of many stocks. Because of this, a low performing stock is less of a risk because there are probably some high performing stocks in the fund that can mitigate the loss. For first time investors, mutual funds can be good because there is a fund manager overseeing their investment which means that the investor does not have to watch the daily stock returns.
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