Investing in  Mutual Funds

What Are Mutual Funds?

Put quite simply, Mutual Funds invest the money of multiple individuals mutually, so that everyone benefits.  They pool the money of all investors so that their professional fund managers can offer the investors greater diversity than they would have otherwise.

Diversity, in investing especially, is considered vitally important.  The more your risk is spread out, the less likely it is that you will face financial devastation if one or two of the companies you are investing in has serious problems.

Let's assume you have $500 to invest.  If there is a $100 minimum required for each stock that you wish to purchase, you could only purchase shares in a maximum of 5 different companies.  With a mutual fund, your $500 goes into a pool with many other investors, allowing you to have money invested in many companies, thus theoretically lessening your risk.

They are not completely without risk, of course.  Since mutual funds invest money just like everyone else does, in stocks, bonds, money market funds, etc. they carry the same risks that any investment does.  Diversity does help lessen the financial risk, but no amount of diversity is likely to help in the event of a stock market crash or other financial disaster.

A good plan of action might be to invest in mutual funds the first few times you put money into investments, and then move on to other methods of investing later.  You might also consider putting a certain amount of money into mutual funds for every bit that you put into other methods.  Perhaps putting $1,000 into mutual funds for ever $5,000 that you invest.

As you can see. mutual funds should probably not be the only thing you invest your money in, but they are certainly a great starting point.  They offer diversification, as well as risk management, but they don't typically offer the type of growth that you might get out of riskier investments.