Mutual funds are an investment strategy that allow you to pool your money together with other investors to purchase a collection of stocks, bonds, or other securities that might be difficult to handle on your own. A mutual fund typically holds over 100 different securities, which means investors gain diversification at a low price.
Mutual funds are handled by portfolio managers. Investing in a mutual fund is pretty hands off and typically doesn’t require much attention from the investor. The portfolio managers primarily focus on seeking out the best investment opportunities to allow the fund to perform better than the previous benchmark. As an investor, having portfolio managers reviewing the portfolio on an ongoing basis is a benefit.
There are three ways your investment in a mutual fund can increase in value; dividend payments, capital gains, and net asset value. When a fund receives dividends or interest payments, the funds are dispersed to the investors, and the investor can either have that dividend payment reinvested or directly receive the payment. When a fund sells a security whose price has increased, that is a capital gain and investors receive those funds annually. The net asset value is the price of the mutual fund after the market has closed each day. This means if the net asset value (NAV) per share increases, then you would make money if you decide to sell your shares.
When searching for a mutual fund to invest in it is important to review the previous year’s data, the fund managers, and how long the fund managers have been managing the fund. These are important because this gives you a general idea of what you should expect if you choose to invest in that particular fund.