Building a portfolio is an excellent idea for everyone, especially with interest rates at historically low rates. While a simple savings account at a bank is certainly low risk, you will earn very little in interest, and it hardly helps you plan for retirement. Investing in mutual funds can be a good option for investors, so consider the following information.
A mutual fund is simply an investment program that includes many different shareholders or investors. The fund is professionally managed and the money invested is diversified or spread among different holdings such as bonds, stocks and other securities. One of the biggest advantages of mutual funds is that the fund has its own professional manager. This manager does all of the investment work for you, and because the fund is spread or diversified, the risk is much less than putting all of your money into one single investment.
Diversity is key for mutual funds, and each fund will include a variety of holdings in about 10 different industry sectors. For example, if you purchase a China fund, it will include investments in many different companies in China or Hong Kong. These companies will be in several industries. Usually, energy and technology are the top ones followed by industrials and banking. You can also diversify even further and invest in a wider Asia fund which will have the same types of companies and holdings, but spread among other countries in addition to China, such as Taiwan, Philippines and Indonesia.
Mutual funds in the United States are available in four different types. Open-ended mutual funds are the most common and provide a good deal of flexibility for investors. These funds are always “open” meaning that there is no limit as to how many shares an investor can buy and how many shares can be sold in general. Another advantage is that the fund has to buy back your shares at any time, so it is easy to liquefy your assets.
In addition to open-end mutual funds, there are also closed funds. These closed-end funds only sell a set amount of shares, so you can’t just keep on buying shares and investing more money. With an open-end fund, you have the guarantee that your shares must be bought back by the fund. This is not the case with closed-end funds, as you have to sell them directly to an investor. This is a far less common type of fund, and there are fewer than 700 currently in the United States, compared with about 6,500 open-ended funds.
The two other types of mutual funds are unit investment trusts and exchange-traded funds. The trusts are unique in that they have a specific end date. You can redeem your shares at the end of this time or at any time before termination. An exchange-traded fund is a fairly new addition to the market, and it is set up to be diversified like an open-ended mutual fund. However, a regular mutual fund trades only at the end of the trading day, while an ETF trades like stocks do during the entire time the market is open. One key advantage with ETFs is that you typically pay less in capital gains tax than you would with a regular mutual fund.