Mutual funds are a diverse investment option managed by a fund manager, with various types available. Actively managed funds aim to maximize returns, while index funds follow a major index. Critics argue that few mutual funds outperform the S&P 500 index, but supporters say they offer an easy way to invest. Choosing a mutual fund involves considering factors such as the investment sector, associated costs, tax status, and social agendas. Diversification is key to smart investing.
A mutual fund is a group of investors who work through a fund manager to buy a diverse portfolio of stocks or bonds. There are countless types of mutual funds, each with their own objectives and methodologies. Whether or not a mutual fund is a good investment is the subject of much public debate, with many saying they are great for the average person, and others saying they are just a bad way to invest.
A mutual fund can be an actively managed fund or an index mutual fund. Actively managed funds are regularly exchanged by a fund manager in an attempt to maximize their return. The fund manager watches the market and the sectors in which a fund invests and redistributes the fund accordingly. An index fund simply takes one of the major indices and buys according to that index. Index funds change much less frequently than actively managed funds, but in theory an active fund has more potential for profit.
Many critics of mutual funds point out that just over 20% of mutual funds outperform the Standard and Poor’s 500 index. This means that almost 80% of the time, an investor would have been more profitable simply by buying equal shares in the 500 companies that they are currently in the S&P 500.
Supporters point out that for most people the complications involved in traditional investing simply aren’t worth it. A mutual fund offers an easy way to invest in something with a higher return than, say, the interest earned at the bank, while keeping the funds somewhat fluid. It also eliminates the need to track the market yourself.
There are more types of mutual funds available than there are publicly available stocks, making the process of choosing one a somewhat daunting prospect for most people. In general, it’s good to look at a few types of mutual funds that catch your eye and research them to see if they’re a good fit for you. The length of time you want to remain invested, associated costs, tax status, and whether a fund is closed or open can all matter.
The investment sector for a mutual fund may also be something you want to consider. There are many funds in the industry, and most often they are the highest performing mutual funds in any given year. The problem, of course, is guessing which sector will see uniform growth and avoiding sectors that may be affected by one-time events, such as transportation.
Many people may also consider mutual funds that have specific social agendas in addition to making a profit. There are a number of environmentally friendly mutual funds that only invest in companies that meet certain best practice criteria. There are also mutual funds based on other social views, political leanings, and religious leanings.
Regardless of the mutual fund you ultimately use, it’s important to stay diversified. Holding some money in long-term funds and stocks, with some in money market funds and bonds, is always a smart way to plan for the future and any shocks that may occur in the market.
Smart Asset.
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