Mutual fund's are companies that pool together cash from different investors to create portfolios of investments. Most mutual funds are open-ended, which simply means the investment is ongoing and doesn't have a pre-set end date. Open-ended mutual funds offer you many advantages -- including diversity and accessibility -- when compared with other types of investments.
Mutual funds usually contain a wide variety of stocks, bonds and other securities issued by companies and governments from around the nation or the world. You're not putting all of your eggs into one basket when you buy shares in a mutual fund because you basically become a part owner of numerous securities. If one stock drops in value it doesn't necessarily hurt you much, because one of the other stocks or bonds in the fund may grow in value. In contrast, when you buy individual securities your returns depend on just a small number of stocks or bonds.
You can manage your own finances by picking stocks and bonds through online brokerage firms. If you want to diversify your investments you can also park some money in bank certificates of deposit and savings accounts. However, managing your own money can prove time-consuming, especially if you're not a financial expert, in which case you must spend hours doing research just to get to grips with your options. Open-ended mutual funds are controlled by fund managers, who are responsible for buying and selling securities. These professionals look for good deals on inexpensive securities, including CDs, and make money by cashing in over-priced stocks, bonds and other securities.
Open-ended funds are highly liquid. You can redeem your shares at any time. When you turn in a sell order, the fund liquidates your shares at the end of the next business day and within a few days you get your money. By comparison, other types of long-term investments, such as annuities and certificates of deposit, are illiquid because you often have to pay penalty fees if you make withdrawals within a certain number of years of creating your account.
You often have to pay a commission known as a load when you buy or sell shares in open-ended mutual funds. Investment companies create mutual funds that have a certain objective, such as an income-generating fund that contains bonds or aggressive growth funds that contain stocks from newly launched companies. Your investment goals may change over time, and ordinarily it could prove to be expensive to sell shares in one fund and buy shares in another that better suits your needs. However, many open-ended mutual fund companies create so-called families of funds. These families contain several mutual funds, each of which has a different investment objective. You can typically move money between open-ended funds in the same family without having to pay any new load fees.
- John Foxx/Stockbyte/Getty Images
- The Best Way to Evaluate Mutual Fund Choices
- How to Open Mutual Funds
- Common Stock Funds
- Should I Keep Money in a Mutual Fund or Sell It?
- Index Trackers vs. Picking Shares
- How to Compare Two Mutual Funds
- Are Mutual Fund Commissions Tax-Deductible?
- The Advantages of an Index Fund Vs. Investing in Stocks