Mutual Funds 101
Before you know whether you want to invest in mutual funds, first you have to know what they are! Very simply, mutual funds are a pool of investor funds that are managed by an investment company. There are two main categories: actively managed funds and index funds.
Actively Managed Funds
As the name implies, actively managed funds are directed by financial professionals who decide where to invest the funds. The goal of actively managed funds is diversification and flexibility. Performance records and expenses are audited. Compared to other types of investments, actively managed funds are relatively low cost.
Passively Managed Index Funds
These types of funds simply mirror the underlying index rather than being directed by managers. They’re also diverse investments because the index is made up of so many different companies. The cost of index funds is even lower than actively managed funds.
Mutual Funds History
The very first opportunity for small-scale investors to invest in many different companies dates to 1774 when a Dutch merchant created a mutual fund with 2,000 units. Once they were all sold, the only way to own units was to buy them from a current owner – no more units were created. The money raised was diversified into various investments, which was the first opportunity for small investors to have multiple investments at once, thus spreading the risk more widely than was possible with any individual investment.
Mutual Funds in the 21st Century
Today, mutual funds can focus on different types of investments, like stocks, bonds, or stable investments. Even those categories can be further divided – investments in stocks could focus on large, stable companies like Microsoft, Apple, or Amazon, or they could focus on relatively small companies with market caps below $2 billion, like Owens-Corning, Energizer Corp., Builders First Source, or MGIC Investment Corp.
Mutual Funds Made Easy
Whatever the focus of the mutual fund, investing in one is a great way for any investor to have easy access to a diversified portfolio. Check out our mutual fund strategies, which you can invest in for as little as $1,000.