What are mutual funds and how do they work?

Do you know mutual funds? You may have heard of them, but are still not sure you understand the concept. The following explains what type of investment it is, how it is classified, and the pros and cons of investing.

What is a mutual fund?

Mutual funds can be a difficult concept for people to understand. However, simply put, the idea is much more accessible: it is a variable capital fund that an investment company shares with shareholders, who invest in stocks, money market instruments and bonds. The individuals and / or groups that invest are known as your shareholders. The investment manager makes all important decisions regarding the purchase, sale, or trading of parts of the mutual fund. Your job is to stay on top of profit, loss, and safety.

A multitude of categories

These types of investments are generally divided into 4 different categories due to the different objectives each investment has, as well as the amount of risk that it carries. They include safety funds, income funds, growth funds, and aggressive growth funds. Safety funds are known to be the safest of the four, while aggressive growth funds are by far the most dangerous.

The advantages of investing

Mutual funds are a popular investment option because they allow a group of investors to pool money to invest in an expansive portfolio that they normally would not have been able to afford on their own. They provide a way for individuals, companies and associations to invest in a fund and be guided by a manager. Due to the variety of the portfolio, the fund is less likely to experience substantial losses.

Possible problems you may face

Although mutual funds are considered a very safe option, there is risk in every investment. Here, the risk comes from losses that could occur through bank accounts, loans, and savings associations. Bonds and stocks carry inherent risk, as their value is constantly changing. Regardless, compared to the average fund alone, mutual funds are even safer. However, an inventory can have a problem with the numerous fees attached to its fund, all of which are necessary no matter how successful the investment is. The diversity of your portfolio also affects your level of price certainty; In other words, because you will have invested in so many different stocks, it will be quite difficult to calculate how much your total investment costs. In addition to this, your manager decides where to put your money, not you.