Diversification—not putting all your eggs in one basket-is one of the fundamental principles of investing. Mutual funds offer an accessible and stable method of achieving that for your portfolio.
Assembling a portfolio of individual stocks and bonds can be expensive, and knowing when and what to buy can be difficult. Mutual funds allow you to invest in many different securities at once, often at a lower cost than what you could achieve on your own. By investing in the fund, you own shares of the fund which, in turn, owns shares of individual securities.
The most common types of mutual funds are:
- Stock funds, which invest in common stocks, generally with capital appreciation as the primary objective.
- Bond funds, which invest in corporate, government and municipal bonds, and provide investors with interest income in the form of regularly scheduled dividends.
- Money market funds, which only invest in certain high-quality, short term investments. Preservation of capital, liquidity and current income are typically the objectives.
- Balanced funds, which invest primarily in a combination of stocks and bonds, and strive to provide both growth and regular income.
While mutual funds may lose money and do not guarantee a profit, mutual funds can offer a more stable investment option compared to individual stocks. The price of shares can change daily, and when you sell, you'll receive the value of your shares at that point in time, which may be more or less than what you paid.
As an investment option, mutual funds offer several benefits:
- Diversification: Most mutual funds own dozens or even hundreds of securities. The managers often spread the fund's assets over more than one type of investment, exposing you to less potential risk than buying individual securities.
- Professional money management: When you buy shares in an actively managed mutual fund, part of what you pay for is the fund manager's expertise. The manager analyzes hundreds of securities and makes decisions on what and when to buy and sell.
- Small investment amounts: Depending on fund rules, you can open an account and make subsequent contributions with a very small initial investment. You can even set up automatic investments through a transfer of funds from your bank account.
- Liquidity: You can convert your mutual fund investment into cash (i.e., redeem your shares) by making a request to the fund company in writing, over the phone or on the Internet on any business day.
Choosing a Fund
Choosing a mutual fund requires careful thinking about numerous factors, particularly your investment objectives, risk tolerance and time horizon. Spend some time researching and work with a Navy Federal financial advisor to select and invest.
Make an investment in your financial future
Call 1-877-221-8108 or find a financial advisor near you.