What is a mutual fund? (Video)
Written by Tangerine
Friday, April 25th, 2014
To put it simply, mutual funds are a type of investment. A mutual fund invests in dozens or even thousands of stocks or bonds. When you buy a mutual fund, you’re not buying a single stock or bond; you’re buying a portfolio of stocks or bonds (or sometimes a combination of both) which also means your investment is more diversified than investing in a single stock or bond. And diversification is a good thing when it comes to investing. As they say, don’t put all your eggs in one basket.
The fund you choose needs to help you meet your goals and you’ll want to choose a fund that is right for you. Maybe you want a more conservative mutual fund that you can rely on to provide you with consistent income. If this is the case, then maybe a bond fund would be good to consider. Or maybe you’re looking to get your money growing as much as possible and you aren’t concerned about regular income. Then you might want to consider a fund that invests all in stocks. There are plenty of tools out there (we have one you can check out here) that can help you understand what would suit your needs.
So how do you make money with a mutual fund? When you buy units of a mutual fund, what you pay is based on the price per unit. If the investments that make up your fund do well, then the price of your units will go up (and you’ll make money if you sell them). If the investments aren’t doing well, then the unit price falls and selling when the unit price is lower than what you paid is what would cause you to lose money.
When it comes to investing in mutual funds, you can put in a lump-sum amount of money, or you can set up automatic contributions (or you can do both). Investing automatically is a good habit because it’s usually easier to manage too. Making it automatic also means you can take advantage of what’s called dollar-cost averaging. That’s just the name for putting in the same amount of money regularly, no matter what the market conditions are. When the price is up, that money will buy fewer units, and when the price is down, the same amount of money buys more. It’s like an automatic way of buying when prices are low, and we’ve all heard that rule that says, “Buy low, sell high.”
Simple, isn’t it?