Mutual funds simply are a method through which people invest. People often asking, "What are mutual funds paying?" The truth is that mutual funds don't pay anything! People also say, "I don't like mutual funds because they're risky." But there's no such thing as a "risky" fund. Nor has anyone ever lost money in a mutual fund. Mutual funds are not good, and they're not bad.

A mutual fund, in fact, is merely a mirror - a reflection of something else. Thus, if you invest in a mutual fund that invests in stocks, and you are as likely to make money or lose money as any other person who invests in stocks.

In fact, you can use mutual funds to buy virtually any kind of investment: stocks, bonds, government securities, real estate, gold and other precious metals, international securities, foreign currencies, natural resources, even hedge positions and money markets. You can find funds that engage in virtually any type of trading activity, including options and futures contracts, derivatives, and even selling short.

Technically, mutual funds are called "open-end" investment companies because they forever buy and sell their shares. In industry jargon, mutual funds "sell" shares to the public, and when you want your money back, the fund will "redeem" them for you.

Comparison between Mutual Funds and Stocks

Diversification

Mutual fund companies invest in a variety of stocks, bonds, and money-market investments, so mutual funds carry much lower risk than stocks.

Professional Management

Mutual funds enable investors to pool their money and place it under professional investment management. These managers have been around the industry for a long time and have the academic credentials to back it up.

Greater Upside Potential

Individual stocks have a greater upside potential than most mutual funds. Fluctuation in stocks is greater than mutual funds, so you have greater chance to earn more return.

Risk and Return

In general, Risk and return depend each other, the greater the risk, the higher the potential return; the lower the risk, the lower the expected return. Mutual funds try to reduce their risk by investing in a diversified group of individual stocks, bonds, or other securities.

Efficiency

Mutual funds have large sums of money to invest and often they trade commission-free and have personal contacts at the brokerage firms.

Conclusion

By investing in stocks you can get more return than mutual funds but, by investing in mutual funds your risk is lower. Mutual funds are great for funding retirement plans and investors that don't have the time or energy to consider individual stocks.

It is noticeable that most expert traders in stock market invest in mutual funds too. I recommend investing in both of mutual funds and stocks but, if you have experience, time and energy you can invest most of your money in individual stocks.

Mutual funds are a group of stocks, which is managed by a professional. That professional uses the money from many different people to purchase stocks from various companies. This way, the people are not as affected by a drop in price by an individual company.

An analogy would be ordering desserts with a group of your friends. If everyone orders a different dessert and shares, then everyone can have a taste of many different things.

Likewise, a mutual fund allows an individual to own shares of many different companies' stocks without such heavy investment.

Mutual funds are attractive to beginning investors because they are relatively easy to understand. They are managed by a professional, so they don't require as much research by the individual investor. It offers a chance to "play the market" without taking the risks that would come with owning stock in individual companies. For example, if a person owned stock in one company that suddenly dropped, that person would be out a lot of money. But if it was part of a mutual fund, then the loss might be balanced out by other stocks in the fund that made gains.

Another attractive thing about mutual funds is that they often fall under several categories. For example, a person who wanted to invest in the technology sector could find a mutual fund that buys stocks from only technology companies. Other popular categories include environmentally friendly companies, pharmaceutical companies, and biotechnology companies.

The most popular mutual fund is probably the S&P 500, which is a group of 500 companies which tends to follow the same trend as the stock market as a whole.

Even though mutual funds present an easier way to invest than investing in individual stocks, an investor should still periodically check their mutual fund to make sure that it is performing the way that they like it to. Many people make the mistake of not reviewing their mutual funds only to find out too late that they have been losing money. Also, which investing in a mutual fund does present a way to diversify your investments, you should also diversify the mutual funds that you are investing in for greater diversification.

Since the mid 1980's, the market of the Mutual Fund industry has grown continuously. Billions of dollars has been invested into the Mutual Fund Industry. Unfortunately, not all of investors make money. Therefore, it is important for you to study a mutual fund carefully before investing. Here are some tips that can help.

Stay Away From Poor Performance Funds: It is important to look at the history of the mutual funds. If it has been bad for awhile, it is probably not for you. The average investor will sell a poor performance fund to find best performing fund.

Over-Diversified Funds Are BAD: Mutual funds are regulated by law to diversify seventy five percents of their assets. They should not have more than five percents of the portfolio in a single security. As the result of the laws, some fund managers are forced to invest in many different stocks due to the size of their funds. Some fund managers are forced to buy poor quality stocks.

Be Careful Of Fund Overlap: Many investors try to diversify their investments by placing their money in different type of funds. Unfortunately, they will be surprised to know that many stocks held by one fund are also held by the other funds. Some investors end up investing in the same stocks over and over without knowing.

Investors who have over $100,000 of investable assets should separate their investment accounts. Separate accounts allow investors to have greater control over taxes and security. Furthermore, these accounts are usually managed by highly professional fund managers.

Mutual funds are good investment option if you are looking to meet your financial goals. The best part about mutual funds is that they are managed by investment professionals and the risk involved reduces as the funds invested in the mutual funds get diversified.

A company dealing in mutual funds invests your money in a variety of bonds, stocks, assets, securities and many other short-term investment instruments. You will earn dividends when a mutual fund earns profit and on the other hand, the value of your shares will decrease if the mutual fund company faces a loss. Usually a professional investment manager will do all the buying and selling on your behalf to ensure that you get the best returns for your investments.

There are different types of mutual funds, namely equity funds, fixed income funds and balanced funds.

Equity funds involve just common stock investments. They are extremely risky but can end up earning you a lot of money. Fixed income funds are government and corporate securities. Fixed income funds offer fixed returns and the risk associated with these funds is very low. Balanced mutual funds are a combination of bonds and stocks. These funds have a very low risk factor but your investment will not earn a lot of returns.

Mutual fund shares can be purchased either through the mutual fund company or from a broker. The mutual fund share is bought at the net asset value of the fund. This is the price you have to pay when you buy a mutual fund share and it includes the shareholder's fee.

The shares of a mutual fund are redeemable. You can sell your shares back to the broker or to another customer. Most mutual fund companies continue creating new shares and selling them so that they can accommodate new investors.

Buying stocks:

The most simple and straightforward method to invest in stocks is to just buy them! All you need to do is sign up at a broker and buy whichever companies you decide are the best investments. The benefits of this method is you choose which companies you believe will perform best. Of course, the drawbacks here are that you may not have enough time to identify which stocks make the best investments. It is also sometimes hard to diversify your portfolio, since you likely will not have substantial knowledge on a variety of stocks from various sectors.

Mutual funds:

If you decide you want someone to do the investing for you, consider investing in mutual funds. When you put money into a mutual fund, you are pooling your money with other investors and allowing professionals to invest it for you. The advantage here is that you do not have to follow your investments yourself, since someone else is doing the work for you. Also, mutual funds tend to buy hundreds or even thousands of stocks, so even just buying one mutual fund can give you diversification. The drawback is that most mutual funds under perform the market (due to fees and asset bloats), so most of the time you are actually better off just randomly picking stocks yourself!

ETFs:

An ETF is like a mutual fund, except it passively tracks an index like the S&P 500. The advantages of the ETF are the same as the advantages of the S&P 500. Also, since ETFs just buy whatever stocks make up an index, they have lower fees than mutual funds. However, by its nature, an ETF will never beat the market since it just attempts to mirror the market. ETFs have become increasingly popular though since many investors have become disillusioned with mutual funds.

If you haven't heard of a fund of funds, you might think it is just a redundancy. The truth is a fund of funds has some important advantages and disadvantages that you need to be aware of. A fund of funds is exactly what it sounds like. It is a mutual fund that invests in other mutual funds. At first it may seem silly to you, but here are some big advantages to investing in a fund of funds:

Double Diversification -A mutual fund diversifies across many different stocks. A fund of funds diversifies amongst many different funds.

Simplicity -Instead of investing in many different funds to achieve the same result, you can just invest in one fund. This allows for much less paperwork.

Cheap for Beginning Investors -It is tough to diversify when starting out because of account minimums. A fund of funds allows for an investor to diversify amongst hundreds or thousands of stocks in one small account.

Institutional Advantages -Funds of funds can often invest in desirable institutional funds that are off-limits for retail investors. They also have the ability to invest in some load funds without paying the load.

Mutual funds are one of the most popular investment vehicles and there is a good reason for that. Mutual funds require small investments and an investor is able to buy a diverse array of stocks and other financial instruments in just one go.

If you have invested in one or more mutual funds, you can be assured that your portfolio is well diversified. Diversification is of great importance in mutual funds. If one your securities perform badly, you will not lose all your investment. There are other securities in your portfolio to offset the bad one.

Mutual funds are managed by investment professionals who have a lot of experience in analyzing and trading stocks and securities. It is the responsibility of the fund manager to select the securities that a particular mutual fund owns. A mutual fund is made up of stocks, bonds, and / or other financial instruments.

Just like stocks, mutual funds are divided into shares. A fund can own shares of different corporation and these in turn split further so that investors like you and me can invest in mutual funds.

All the shares of a mutual fund have a net asset value. So if the net asset value of a mutual fund is $1 billion then each share of that mutual fund would be worth $10. It is the responsibility of the fund manager to buy and sell shares that the mutual fund owns. However, you can also buy and sell your shares but only at the end of the trading day.

Each mutual fund comes with a prospectus which lists down the types of securities along with the investment objectives and strategies. You should read the prospectus before buying a mutual fund so that you know what you are getting into.

Mutual funds simply are a method through which people invest. People often asking, "What are mutual funds paying?" The truth is that mutual funds don't pay anything! People also say, "I don't like mutual funds because they're risky." But there's no such thing as a "risky" fund. Nor has anyone ever lost money in a mutual fund. Mutual funds are not good, and they're not bad.

A mutual fund, in fact, is merely a mirror - a reflection of something else. Thus, if you invest in a mutual fund that invests in stocks, and you are as likely to make money or lose money as any other person who invests in stocks.

In fact, you can use mutual funds to buy virtually any kind of investment: stocks, bonds, government securities, real estate, gold and other precious metals, international securities, foreign currencies, natural resources, even hedge positions and money markets. You can find funds that engage in virtually any type of trading activity, including options and futures contracts, derivatives, and even selling short.

Technically, mutual funds are called "open-end" investment companies because they forever buy and sell their shares. In industry jargon, mutual funds "sell" shares to the public, and when you want your money back, the fund will "redeem" them for you.

Comparison between Mutual Funds and Stocks

Diversification

Mutual fund companies invest in a variety of stocks, bonds, and money-market investments, so mutual funds carry much lower risk than stocks.

Professional Management

Mutual funds enable investors to pool their money and place it under professional investment management. These managers have been around the industry for a long time and have the academic credentials to back it up.

Greater Upside Potential

Individual stocks have a greater upside potential than most mutual funds. Fluctuation in stocks is greater than mutual funds, so you have greater chance to earn more return.

Risk and Return

In general, Risk and return depend each other, the greater the risk, the higher the potential return; the lower the risk, the lower the expected return. Mutual funds try to reduce their risk by investing in a diversified group of individual stocks, bonds, or other securities.

Efficiency

Mutual funds have large sums of money to invest and often they trade commission-free and have personal contacts at the brokerage firms.

Conclusion

By investing in stocks you can get more return than mutual funds but, by investing in mutual funds your risk is lower. Mutual funds are great for funding retirement plans and investors that don't have the time or energy to consider individual stocks.

It is noticeable that most expert traders in stock market invest in mutual funds too. I recommend investing in both of mutual funds and stocks but, if you have experience, time and energy you can invest most of your money in individual stocks.