What Is a Mutual Fund and How Can I Invest Money?
If you are looking for a good way to get started with investing, mutual funds allow even the smallest investors to build a diversified portfolio of stocks, bonds or other investments. This allows those small investors to design a portfolio that has both lower risk and a greater potential for appreciation than they could build on their own.
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How Mutual Funds Work
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Mutual funds allow the small investor to get the kind of diversification that would be difficult to achieve on his own. The mutual fund company takes the money from all of its investors, and uses that cash to purchase a diversified basket of stocks, bonds or other securities. Mutual funds can hold dozens, or even hundreds, of different stocks, and those large holdings can reduce the risks associated with stock market investing.
Types of Mutual Funds
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When investors think of mutual funds, they often think of stock funds first, but in fact there are many different kinds of mutual funds. If you prefer a fund that provides current income, you can choose a bond fund or a fund that invests primarily in dividend-paying stocks. You can also choose international stock funds, which invest all money outside the United States, or sector funds, which invest solely in a particular industry like pharmaceuticals or energy. You can even use money market mutual funds as a safe haven for your cash or to build an emergency fund.
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Account Application
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You must complete an application to invest in a mutual fund, and this application requires you to provide personal information, such as your name, address and phone number. In some cases you might also be asked about your job, your income and your level of investment experience. Most mutual fund companies now provide Internet access, allowing you to complete your application online and make your initial investment via a transfer from your bank.
Dollar Cost Averaging
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After the mutual fund account is open, the next step is to fund that account. One of the most effective ways to build wealth in a mutual fund is through dollar cost averaging. When you dollar cost average into a mutual fund, you put a small amount of money in on a regular basis, often once a month. Over time, that approach guarantees that you buy more shares of the fund during periods of short-term market declines, and fewer shares when the market is very high. That buy low approach puts you in an excellent position for when the market recovers and the value of the shares you own increases.
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