What Are Mutual Funds?

Money market funds are also highly liquid and usually FDIC-insured, making them a safe and convenient place to hold your cash.

Target-Date Funds

Target-date funds hold a mix of stocks, bonds, and other investment types. These funds seek to make things easier for the average investor.

They do this by changing your target allocation over time, as you inch closer to retirement. As such, they will usually have a year attached to them, such as “target date 2050.”

These funds also rebalance your investments for you, so it’s completely hands-off.

Benefits and Drawbacks of Mutual Funds

Mutual funds have plenty of benefits, but that doesn’t mean they are perfect. Here are some of the benefits and drawbacks of mutual funds:

Benefits

  • Diversification. Most mutual funds are inherently diverse, investing in a large number of companies. This lowers your risk without having to spend time buying shares in each company.
  • Dividends. If some of the companies your mutual fund includes issues dividends, you will also receive them.
  • Capital gains. If a sells new securities at an increased price, there is a capital gain. Investors receive a cut of that (less capital losses).
  • Lower fees. Many mutual funds have lower fees than you would pay a financial advisor.

Drawbacks

  • Not without risk. Although mutual funds are less risky than idividual stocks, that doesn’t completely eliminate risk. If the entire stock market takes a dive, your mutual fund may, too.
  • You don’t control investments. If you would rather not pick your own investments, this can be a good thing. But investors who like more control may go elsewhere.

Where to Buy Mutual Funds

You can have mutual funds in your 401k or similar plan, IRA, or brokerage account. If you already have a retirement acccount through your employer, it likely invests in mutual funds.

You can also open an IRA or brokerage account through a brokerage like Vanguard, Fidelity, or Schwab. Plenty of popular funds are on those platforms.

What Should My Fees Be?

An important note here is that mutual funds can be either actively-managed or passively-managed. Unsurprisingly, actively-managed funds have higher fees.

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Disclaimer: Before you throw out all other financial advice you’ve been given and dedicate your life to following my advice, please be aware that I am not a financial expert. I have never ...

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