Understanding Mutual Funds: A Beginner's Guide to Investing

Mutual funds, like stocks and bonds, are very common investment instruments among large and small investors alike. When you buy shares of a fund, you become part owner – along with other fund investors – of a large investment portfolio made up of hundreds or even thousands of individual securities issuers. A professional investment advisor manages the fund's investments according to its stated objectives, for instance, long-term growth, current income, etc. This is one of the primary reasons that mutual funds have become so popular. Most investors, especially private individuals, would be extremely hard-pressed to successfully direct or even afford such a large number of different singular investments. Furthermore, the diversification inherent in so many separate issuers within a single fund works to sharply curtail the risk of serious loss due to the underperformance of any one company or industry.

Most investors in the U.S. use mutual funds as their primary means of buying securities. Because of their built-in professional management feature and typically lower (often very low) initial investment requirement, they're heavily employed by novice investors, many of whom have been guilty of using the set-and-forget technique. But mutual funds, like every other type of investment, must be attended to in order to fully maximize their performance. The information contained in this Section will guide you not only in the basics and intricacies of mutual funds, but also teach you how to evaluate a fund's management, as well. Use this knowledge wisely; after all, no one – even if they're paid to do so – cares more about your money than you do.