What Are Mutual Funds?

What Are Mutual Funds?

The easiest way to explain mutual funds is to compare them to a betting pool. Say there’s a game going on, but you only have $5 to put down on it. That’s not very much to lose, but it also won’t yield you much if you win. If you get together with a bunch of friends though, and you all pool your spare cash then you can put down a much bigger bet than any of you could make individually. This gives you a bigger investment to make, and if you win you can split the pot according to how much each person put in.

That’s sort of how mutual funds work, except without all the fancy jargon and investing terms.

Put another way, a mutual fund is a pooled investment where all investors contribute, and the fund manager invests the pool. The funds in the pool may be used to purchase government bonds, stocks, securities, and a number of other investment vehicles, and the profits made on all of those are divided equally among all who invested according to how much they invested.

Why Invest in Mutual Funds?

Investors who already have hundreds of thousands of dollars in financial leverage don’t, strictly speaking, need to invest in mutual funds. For those who want to be able to make big investments without a big lever though, these funds allow you to throw your weight in with a lot of other small investors so that, combined, you can all do something pretty big.

Mutual funds, despite their obvious appeal, aren’t a guaranteed investment. It’s entirely possible that the person managing the fund buys stocks that plummet, or buys bonds that turn to lead overnight. It’s just as important to check the performance history and content of a mutual fund as it would be to research a company before buying stock in it. If a mutual fund has a solid performance history though, and it looks like it would be a solid place to plant your seed then there’s no reason not to use it to grow a money tree.

Other Investment Articles

If you found this article helpful, then check out some of the others I’ve written regarding investing and finances.

What Is The Gold Standard, And Why Is It No Longer In Use?
What is an Individual Retirement Account (IRA)?
How to Make Money on The Foreign Exchange (Forex) Market
How to Make Money on The Stock Market
What Are Binary Options, And How Do You Make Money With Them?

References

“Definition of ‘Mutual Fund’” by Anonymous at Investopedia
“What is a Mutual Fund?” by Kent Thune at About

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