What Are Mutual Funds & How Do I Invest In Mutual Funds?

Mutual funds are called “mutual” because it the fund pools money from numerous investors to invest in a variety of securities. A “fund” in investment terms is not a single investment, but investments in numerous securities, such as bonds, stocks and money markets. So a mutual fund is an investment by a lot of investors in a lot of different kinds of investments. The mutual fund is overseen by an investment company or a fund manager.

A mutual fund is a collective investment and was a financial innovation of the Roaring Twenties decade of the 1920’s, when more Americans than ever were investing in the stock market. Despite the Stock Market Crash of 1929, mutual funds remained (aided by the regulations of 1933 that placed mutual funds under the regulation of the Securities Exchange Act or SEC.) Mutual Funds began to be a factor in international finance by the 1960’s. Some mutual funds today have assets at well over $100 billion. A major boost to the growth of mutual funds was a 1970’s change to the IRS tax code which created IRA accounts. The creation of 401k accounts were also instrumental, because both IRA and 401(k) accounts often invest in mutual funds today.

Mutual Fund Investments

Mutual funds investments include in various kinds of securities. These might be stocks and bonds. Certain stock funds known as “sector funds” invest mainly in one industry. This is just one indication of how many different types of mutual funds there are.

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For instance, some mutual funds invest in what are called “high-yield junk bonds”. The junk bonds are rated below investment grade bonds, because there is a larger risk of defaults on the bonds. To attract investors, the yield on these bonds are much higher.

Other mutual funds involve investment-grade corporate bonds. Some mutual funds might focus on corporate bonds, while others focus on government bonds. Another difference in mutual funds are those which invest in long-term investments, and those invest in short-term investments.

Mutual fund portfolios are managed by a professional investment manager, who not only determines the likely yield and risk of investments, but also the likely cash flow into and out of the mutual fund. People investment fund put their trust in this money manager to manage their mutual portfolio.

Investing In Mutual Funds Online

Investing in mutual funds online can be done through internet stock brokers like T Rowe Price or ScotTrade. When you go to an investment website like T Rowe Price, you’ll see all the funds listed by category, such as “retirement funds”, “domestic stock funds”, “domestic bond funds”, “international funds” and “asset allocation funds”. There are tools on the site to guide you, such as the risk key on the funds, dividend distribution stats and daily prices on stocks.