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Think of a mutual fund as a way for many investors to pool their money and have it professionally managed toward a common investment goal. A fund may invest in stocks, bonds, cash equivalents or a combination, depending on its stated objectives.
As an investor in a mutual fund, you own a portion of the fund, sharing in any increases or decreases in the value of the fund. You have the benefit of having someone else mange your investments, take care of record keeping for your account, and spread your investment dollars over different investments.
For most investors, the main reason to put money into mutual funds is their potential for long-term growth or current income. But there are other potential benefits mutual funds may provide:
Diversification
By investing in a mutual fund, you get a measure of diversification. But despite the built-in diversification offered by mutual funds, it's important to choose funds that provide the right risk/reward balance for your needs.
Diversification reduces risk but does not eliminate it.
Professional research and management
If you're like most people who don't have the time or energy to thoroughly research individual stock or bonds, a mutual fund may make a lot of sense.
Cost efficiency
By pooling money together in a mutual fund, investors may purchase stocks or bonds with much lower trading costs than if they did so on their own.
Liquidity
With most funds, you can easily sell your fund shares for cash. Mutual fund shares are purchased and redeemed at the next net asset value calculated after an order is received; while stocks and bonds can be bought or sold any time the markets are open at whatever price is available.
AARP Financial Inc. does not provide tax advice. Please consult a tax advisor for information pertaining to your particular situation.
The information and content provided herein is general in nature and is for informational purposes only. It is not intended, and should not be construed, as a specific recommendation, or legal, tax or investment advice, or a legal opinion. Individuals should contact their own professional tax or investment advisors or other professionals to help answer questions about specific situations or needs prior to taking any action plan based on this information.
The Financial Advisors are investment adviser representatives of AARP Financial Inc., an investment adviser.
^ The sale of an investment for the purpose of rebalancing may be subject to taxes.