Recently, investing in financial institutions has been a significant part of our retirement plans, healthcare balances, and college savings. According to Michal Ann Strahilevitz Ph.D., “As both a researcher on the psychology of investing and an investor myself, I have learned that understanding the psychology of investing can help you manage both your money and your emotions around your money.” Some people even want to invest in both stocks and bonds. The best way to engage in this kind of investment is through mutual funds.
What Are Mutual Funds?
A mutual fund is a setup where certain company pool investments, through stocks and bonds, under professional management. You can think of it as one entity which brings together a large number of people to invest their money in this portfolio. A fund manager is then hired to manage this amount of money. “Feeling out of control, financially, can cause any investor — large-scale or small — significant anxiety,” says Loren Soeiro, Ph.D. ABPP.
On average, the mutual fund’s setup returns two percent more to its shareholders as compared when money is invested in the general stock market.
Advantages And Disadvantages Of Mutual Funds
Many individuals put their money in mutual funds without knowing its pros and cons.
Advantages
1. Professional Management
The main benefit of mutual funds is not having to manage investments on your own. Instead, a professional investment manager handles these kinds of operations through skillful trading and careful research.
2. Diversification
Buying a mutual fund enables an individual to get hold of several companies in different sectors. This kind of setup increases the possibility of higher market returns.
3. Liquidity
Most mutual fund investments are easily converted into cash depending on your contract.
Disadvantages
1. Higher Costs And Fees
Running a mutual fund is expensive. There are higher costs because you get to pay for every step—from the salary of the portfolio manager up to the quarterly statements of investors.
2. No Control
Since you are not picking your pool of stocks, a mutual fund relies on the expertise of others.
How To Start Investing In A Mutual Fund?
There are different ways to invest in a mutual fund. Like the process of buying a share of stock, you can purchase mutual fund shares if you already have a brokerage account. If you do not have the said account, you can pay a visit to a broker, insurance agents, financial planners, or banks. They usually receive load or a commission fee once you transact with them.
In some institutions, there is a minimum initial investment. It usually ranges from $1,000 to $5,000. However, you can still invest in the market with as low as $25. You have to find companies which offer this service.
Types Of Mutual Funds
There is a wide variety of mutual funds you can choose from. It only depends on several factors such as your risk appetite, time horizon, or financial goal.
1. Equity Funds
This type of mutual fund means that you are putting most of your money in stocks. The primary goal of equity funds is to invest in a wide range of industries and sectors and achieve long-term capital growth.
2. Balanced Funds
Balanced funds are a combination of bonds and stocks. The average share of stocks in this setup is usually from 50 to 65 percent while the rest is placed in bonds.
3. Bond Funds
This is a pooled money dedicated to investing in bonds issued by the government or companies. Bond funds get their profit from regular interest payments from the lender.
With a more organized set up in mutual funds, it is important to save up some money to invest for the future. Just make sure to plan and manage your investments well for higher market returns. According to John Nofsinger Ph.D., “Without trust, people won’t invest in the stock market. This impacts participation in retirement programs at work and owning mutual funds, as well as direct ownership of stocks.”