What is a mutual fund?
A mutual fund is an investment vehicle that pools money from individual investors to invest in stocks, bonds, and other securities. To illustrate how funds work, imagine you and 9 friends decide to start an investment club by contributing $1,000 each. As 1/10th owner, you'd be entitled to 10% of the value of the club's investments at any time. That's basically how a mutual fund works.
What are the benefits of investing using mutual funds rather than individual stocks or bonds?
Diversification: If you purchase the right type of fund, you can have a properly diversified investment portfolio with a single mutual fund.
Professional Management: Few people have the time and expertise needed to manage their money, and mutual funds are an easy way to have a professional manage your money.
Simplicity: Buying a fund is easy, and often you can get started with as little as $50 to $100 per month. And mutual funds don't need to be monitored on a daily basis.
What are some of the questions investors should ask before investing in a fund?
"Who manages the fund?" Make sure it is operated by a reputable company and managed by a knowledgeable manager or team.
"What is the investment strategy?" Make sure you understand and agree with the goal of the fund and that it's appropriate for your needs.
"What are the risks?" Be sure you understand the potential short- and long-term risks involved before investing.
"What are the costs?" All funds charge ongoing management expenses, so be aware of how much those are. Some funds charge sales charges, or commissions, and I recommend staying away from those funds in favor of "no-load" mutual funds.
Remember that these topics are general in nature, so consult with your financial advisor about your specific situation before making any investment decisions.