Welcome to Money Basics, Yahoo Finance’s new personal finance series offering quick explanations for some of the most important terms involving your money.
You’ve probably heard the expression “strength in numbers.” That’s a strategy of mutual funds.
A mutual fund pools the contributions of many investors, and the money gets invested on their behalf. A professional manages the fund so you don’t have to constantly monitor markets and your investments. Having a large group of investors increases the purchasing power of the fund and opens up the possibility of maximizing profits. Investors own shares in the fund, not in the companies or entities the fund invests in.
Mutual funds are typically made up of a wide variety of assets—including stocks, bonds and cash—that people might not be able to afford on their own. So, instead of owning individual stocks or bonds, their risk is spread out across the fund.
But, as with any investment, there are risks. Be sure to research the level of risk a particular fund is exposed to. High-risk funds can sometimes make you more money, but your chances of losing money will also be higher.
All mutual funds have fees—that professional managing your money has to get paid, after all. Some mutual funds have relatively manageable fee structures, but others come at a high cost and only make sense to invest in if you’re able to contribute a lot of money.
Make sure to read all the documentation associated with a particular mutual fund and be aware of any all fees that they may charge, including the common maintenance fee.
Understanding mutual funds is a good step toward building your finances.