Select’s editorial team works independently to review financial products and write articles we think our readers will find useful. We earn a commission from affiliate partners on many offers, but not all offers on Select are from affiliate partners.
Buying individual stocks is certainly a way to try and grow your wealth in the market, but it comes with considerable risk. In addition, choosing which stocks to invest in requires doing extensive research beforehand.
For those who want a way to invest that’s more convenient, with lower costs, less risk and more diversification, mutual funds are a good option.
Subscribe to the Select Newsletter!
Our best selections in your inbox. Shopping recommendations that help upgrade your life, delivered weekly. Sign-up here.
How mutual funds work
Mutual funds work by pooling money together from many investors. That money then gets used to purchase stocks, bonds and other securities. Because mutual funds invest in a collection of companies, they offer instant diversification (thus lower risk) to investors. Mutual fund investors share in the fund’s profits and losses.
You have probably heard of index funds and ETFs before, which are two types of passive-investing mutual funds. There are also, however, actively managed mutual funds. These are mutual funds that are run by fund managers who choose your investments and buy/sell securities based on the fund’s goals.
Actively managed mutual funds usually aim to beat the market (though outperforming the market regularly over the long term is hard to do), while passively managed index funds, for example, work to simply match the market’s performance. For example, an S&P 500 mutual fund would try and replicate the performance of the S&P 500 stock market index buy investing in a tiny percentage of each of the companies in the S&P 500.
With mutual funds, investors have a lot of choices to try and grow their money between stock funds (“equity funds”), bond funds (“fixed-income funds”) or funds that offer both (“balanced funds”). Within these categories, there are even more distinct funds to choose from. For example, “sector funds” allow you to invest in a specific industry, like clean energy, while “growth funds” allow you to focus on companies with capital appreciation.
Get started investing in a mutual fund with a brokerage account
Since actively managed mutual funds require daily human management, investing in one could come with higher management costs and fees than choosing a passively managed index fund. Also, note that many mutual funds will require a minimum investment, ranging from $500 to $3,000. Though some have no minimums whatsoever.
To …….