Mutual funds are a type of investment that are different from most others.  Usually when you invest, you are putting your money into a corporation, commodity, currency, or real estate, or you are lending your money.  All the money goes to one place.  Mutual funds are set up differently.

If you decide to start investing in mutual funds, the money you put in is pooled together with the money of many other investors.  The fund manager uses all the money together to invest in often hundreds of different investments.

How do Mutual Funds Compare to Individual Stock Buying?

In some ways, mutual fund investing is the same as stock buying.  A large majority of mutual funds are invested primarily in corporate stock.  An example would be index funds.  An index fund contains all the stock of corporations within a certain index.  As S&P 500 index fund includes the stock of corporations in the S&P500. Soem of the best index funds are those that minimize costs will mimicking the S&P 500.

Not all mutual funds contain only stock.  Many include other investments as well such as bonds and currency.  Essentially, mutual funds are stocks, bonds, and/or other investors.  They are just packaged differently.

Why would you Buy Mutual Funds instead of Other Securities?

If mutual funds include stock, why not just buy the stock?  There are several benefits to mutual funds that you don’t get through individual investments.  The main benefit for many ordinary investors is the ease and simplicity.  When you buy shares of stock, you have to research the corporations and continue to monitor your investments.  When you buy mutual funds, you only have to make the initial investment.  Minimal management is necessary thereafter.

Another benefit is the automatic diversification.  When you buy stock, you need to buy stock from multiple corporations to minimize risk.  If you invest in one corporation and that corporation loses money, you’ve had a loss.  If you owned stock in 5 different companies including the stock that went down in value but the others increased, you would still earn money because the other stock balanced out the loss and then some.

Diversification is a time consuming and often difficult process.  With mutual funds, you avoid that altogether.  If you invest in an index fund that has no load fee, you don’t have to pay a high commission and you get a market average instead of depending on the skill or lack thereof from the fund manager.

Are Mutual Funds the Superior Investment?

Should everyone invest in mutual funds instead of stocks or other securities.  No, some people are willing to put in extra time and use-hard earned knowledge and skill to earn a higher return.  If you aren’t willing to do that, give mutual funds a try for retirement funds and other investments.