Everyone wants to grow their money without a lot of risk. Unfortunately, investing is complicated but one great way folks grow their money without lots of risk is with a common investment called a Mutual Fund. The basic idea is that a lot of people put in a little bit of money, and then professional money managers do things with it to make more money for everyone involved. It reduces the risk of loss, and allows experts to direct the growth. Let’s take a closer look!
Here are Five Fast Facts about Mutual Funds:
- 🇳🇱 Back To The Beginning - The first mutual fund goes all the way back to some Dutch people in 1774. They were trying to make a way for normal people (not just the rich) to pool their investment resources and reduce risk, and it worked. Over the next century or so, the concept spread across Europe and over into the USA. We Americans didn’t create it, but one could say we supercharged it later.
- 💰 Up Or Down - A mutual fund’s value is based on the assets it holds. Depending on the type of fund, it may hold (meaning invest in) stocks, bonds, real estate, or other things. So, as the value of those things goes up and down based on the markets, so does the value of the mutual fund. Each person’s share of money put in is the share of the growth that comes out. The more you put in, the more you get back…or lose!
- 🧺🥚 Diversifi-what-now? - One of the most important ways to protect your money is diversification. If you’ve ever heard the phrase “don’t put all your eggs in one basket,” then diversification is putting your eggs into a bunch of different baskets. If you have them all in one basket and that basket gets stolen by a particularly clever fox, then all your eggs are gone (and you didn’t even get to enjoy an omelet!). But, if you put your money into ten different baskets, any one of them going away is bad but not catastrophically bad. And chances are good that one or more of your other baskets are multiplying their eggs, too. This means you can have an omelet and still come out ahead!
- 🤓 Who Calls The Shots? - Mutual funds are managed by investment experts and professionals who do nothing but study investments. They learn about the companies they may (or may not) invest in, they watch the markets carefully for events that will impact their investments, and they constantly make adjustments as needed. Their whole job is to make their fund earn more money for shareholders, and especially to do better than the market overall. Your money’s growth rate is their grade card!
- 💸 Bringing It Home - Mutual funds affect your Paycheck mostly because of taxes (are we surprised by this?). How you get taxed on income through mutual funds depends on a lot of things – and this is where we would strongly recommend you consult a tax professional – but one of the biggest is if you sell your funds. The growth you get from the investment will generally be taxed as income (again, depending on the type of fund, how long you held it, etc.) so be prepared to pay Uncle Sam for the privilege of getting your own money. Some funds also pay out dividends without you having to sell, which means excess income from the investments in the fund is sent to you according to the amount of money you put in. Uncle Sam will come knocking for taxes on that, too, naturally.
🔥Bottom line: The best part about mutual funds is that they’re very accessible to normal folks. You don’t have to be a millionaire to start, you don’t have to get super involved, and it’s not particularly risky compared to most other investments. It’s a great way to put your money to work for your own benefit, especially if you start early. If you’re thinking about investing, this is a great way to go!
What’s been your experience with mutual funds?
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