In the past few years, more and more people have been putting mutual funds into consideration when thinking of where to invest their hard-earned money and how to effectively handle their finances. What are mutual funds and why are the numbers jumping onto the mutual fund bandwagon increasing?

A mutual fund is also called an “open-ended company” and is one of the three basic types of investment companies. A mutual fund is a type of investment where a company raises money by directly selling shares of the mutual fund to several shareholders and/or investors. The price of a share is the mutual fund’s per share Net Asset Value (NAV) and this fluctuates and is calculated on a daily basis. The investment company then uses the collected money to purchase various types and combinations of assets and securities such as stocks, bonds, and other money market tools. Shareholders of the mutual fund make money by having the income from the different investments divided among them according to the value of their shares. All of the assets of the mutual fund are collectively called its portfolio and is handled by a fund manager or a portfolio manager. Shareholders in the mutual fund are free to give up their shares and may sell them at any time they deem it proper to do so.

There are numerous mutual funds to choose from but they generally fall into three categories. The first one is the money market fund, the second is the bond fund, and the last one is the stock fund. Each of these types of mutual funds generally earn money the same way for their investors but they all have varying degrees of risks and altering amounts of returns.

A mutual fund is great for passive investors because first and foremost, someone else does the portfolio handling for you. Mutual funds are handled by investment companies which are composed of individuals who are professionals in the money market business. While having the benefit of this professional management, mutual fund shareholders also have the advantage of having a diverse investment portfolio. Having many different investments instead of just one further lowers an investor’s risks and protects the investor from a potential failure of an investment. Mutual fund shares also do not initially require a large amount of money, so this means that they can cater to those who do not have the capital yet but would like to invest in a mutual fund. Lastly, the fact that a shareholder can sell his or her shares at any time makes mutual funds even more attractive to many people.

So is a mutual fund for you? Just like any other form of investment, it is best to examine your financial status before putting your money into it. A mutual fund may be performing exceptionally well for one season, but in the money market, past performances is never a guaranteed indicator of future performances. You may also be the type who would rather handle his/her own investments rather than entrust it to other people. Analyze your financial goals first and check if the characteristics of mutual fund coincide with them. Many people have earned huge sums from mutual funds, but always keep in mind that higher returns always involve higher risk.