Mutual Funds

You have probably heard how important diversifying your portfolio is.  The stock market is unpredictable; a single investment, no matter how stable the company has been in the past, can be catastrophic if the market turns for the worse.  The more representative of the entire market your portfolio is, the more likely it will mirror the market’s track record.  On average, this has been one of steady increases.  The old adage “never place all your eggs in one basket” easily sums up this situation. 

This is where mutual funds come into play.  Investment companies are the primary backers of mutual funds.  Their main purpose is to provide capital to other companies.  Like a seasoned individual investor, these investment companies buy shares of many companies in various sectors.  In order to provide the capital to do so, these investment companies offer shares themselves.  When you buy a share of the offering, you are buying a piece of the entire portfolio that company holds. 

There are several different types of mutual funds.  Some, such as diversified common stock funds, focus mainly on common stock offerings.  There are also common stock funds that participate only in certain sectors of the market, called specialized funds.  Funds that buy both stock and bonds are called balanced funds.  These funds are usually more conservative than other funds. 
               
Other, more obscure funds include municipal bond funds, government securities funds, and hedge funds.  Municipal bond funds generally invest only in municipal bond offerings, while government securities funds invest in various U.S. backed treasury bonds.  Hedge funds are a little more unusual.  The managers of these funds often engage in aggressive trading techniques such as selling stock short.  They are not limited to any one type of security, they focus on anything that offers a good return.  

Mutual funds are great for beginning investors who do not have enough money to properly diversify their portfolios themselves.  With as little as $500 for some funds you can buy shares.  Along with being much cheaper than investing for yourself, the services of a full-time manager accompany the fund.  Rather than spending hours meticulously studying your choices, you have a seasoned veteran who is doing so for you.  With the right research prior to investing, you can tell which mutual funds have been successful and which ones have not.  Like regular stocks, mutual fund share values are listed in the business section of the newspaper.

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