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Why Mutual Funds
Let's suppose you're just getting started as an investor and have $5,000 to
invest and you have three important goals you want to achieve. First, you don't
want to lose your money in a risky venture so you want security, like that found
in a certificate of deposit or other fixed income investment. But you also want
to make the most money you can, so you want the prospect for growth potential,
too. Finally, since you don't have the time or knowledge to actively manage
your money, you want professional money management -- occasionally diversifying
your investments into promising new opportunities. That sounds like a very
good plan, but where can you invest your money and have a chance to meet
all three criteria?
Certificates of deposit and other fixed income investments offer security,
but often with low rates of interest and a fixed potential for growth. Individual
stocks may carry greater potential for growth, but $5,000 isn't a lot to
invest and if you put it all in one stock, you risk everything if it performs
poorly. And, brokers and investment advisors can offer you advice and money
management, but at a price -- you pay for their services, which reduces
further the amount you have available to invest.
So where can you invest your money? The answer for more and more Americans
is to invest in mutual funds.
What is a Mutual Fund?
More than 80 million people, or one out of every two households in America,
invest in mutual funds. Currently, over $6 trillion is invested in mutual funds.
While funds have been around since the 1920's, their popularity over the past 25 years
has soared. The reasons:
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mutual funds make it easy and less costly for investors to satisfy
their need for capital growth, income and/or income preservation |
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mutual funds bring diversification and professional money management
to the individual investor |
A mutual fund is a company that pools the money
of many investors -- its shareholders -- to invest in a variety of different
securities. Investments may be in stocks, bonds, money market securities
or some combination of these. Those securities are professionally managed
on behalf of the shareholders, and each investor holds a pro rata share
of the portfolio -- entitled to any profits when the securities are sold,
but subject to any losses in value as well.
For the individual investor, mutual funds provide the benefit of having
someone else manage your investments, take care of recordkeeping for your
account, and diversify your dollars over many different securities that
may not be available or affordable to you otherwise. Today, minimum investment
requirements on many funds are low enough that even the smallest investor
can get started in mutual funds.
A mutual fund, by its very nature, is diversified -- its assets are invested
in many different securities. Beyond that, there are many different types
of mutual funds with different objectives and levels of growth potential,
furthering your chances to diversify.
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