Mutual funds have traditionally been the go-to investment choice for people who would like a better and relatively safer return on their money. For one, mutual funds can offer diversification, something that cannot be expected in some types of investments.
However, they do carry some amount of risk. If you’re thinking of investing in mutual funds, here are some risks and benefits to consider:
What are mutual funds?
The term mutual funds refer to the collection of money sourced from several different investors. A company, usually a bank, a finance management firm or an insurance firm, collects the money and invests it in diverse stocks, bonds, securities, assets and/or money market.
This pool of money is referred to as the portfolio. Members’ individual shares (and subsequent income) are calculated based on their proportionate ownership.
Benefits of investing in mutual funds
Mutual fund investments are diversified, meaning, the holdings are spread out across multiple types of businesses and industries. This helps minimize losses should one or two business or industry sectors fail.
Mutual funds are also relatively affordable, allowing small amounts of investments to be pooled. In case of an emergency, it’s easy for investors to cash in their shares – inclusive of charges and fees, of course.
Mutual funds are also managed by professionals (often referred to as money managers) who are experienced at researching and selecting the best investments to make the fund grow.
When investing in mutual funds, know that all control is relinquished to the fund managers. That means only the fund managers will decide on the type of investments that are included in a portfolio.
There are also costs associated with these funds, such as annual fees and sales charges. These costs will be charged even if the fund performs badly. Interest payment or dividends can also rise and fall, depending on how the market behaves.
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