Chapter 2. Mutual Funds: Pros and Cons

In This Chapter

  • Seeing how mutual funds work

  • Discovering reasons to choose mutual funds

  • Considering the drawbacks

I'm not sure where the mutual in mutual funds comes from; perhaps it's so named because the best funds allow many people of differing economic means to mutually invest their money for

  • Easy diversification

  • Access to professional money managers

  • Low investment management costs

No matter where the word came from, mutual funds, like any other investment, have their strengths and weaknesses that you need to know about before you invest your money. This chapter discusses the advantages and disadvantages of mutual funds.

Getting a Grip on Mutual Funds

A mutual fund is a collection of investment money pooled from many investors to be invested for a specific objective. When you invest in a mutual fund, you buy shares and become a shareholder of the fund. The fund manager and his team of assistants determine which specific securities (for example, stocks or bonds) they should invest the shareholders' money in, in order to accomplish the objectives of the fund and keep shareholders happy.

A misconception some investors hold regarding mutual funds is that they invest in stocks and, therefore, are too risky. They don't, and they're not. By using mutual funds, you can invest in a whole array of securities, ranging from money market funds, bonds, stocks, and even real estate.

All mutual funds aren't created equal. Some funds, such as money market funds, carry ...

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