Mutual Funds

A mutual fund is a pool of lots of investors’ money to purchase a variety of investments such as all six types we have previously covered. There are many different types of mutual funds.

Stock mutual funds, which own stock in many companies
Bond mutual funds, which own a variety or a specific type of bond
Money market funds, which own a variety of short-term investments such as CDs and T-bills
A gold fund, which owns a variety of gold stocks
A real estate investment trust (REIT) mutual fund, which buys and manages a variety of buildings
Global mutual funds, which invest in stocks and bonds of foreign countries

Mutual funds are diversified investments that help put your eggs into many baskets. To invest, you can buy as little as one share (a unit) of a mutual fund.

Advantages

Professional management - Mutual funds hire professional money managers to manage the fund.
Diversification - The money of a mutual fund is put into different types of investments. Some prices will go up and some will go down; in the long run, gains and losses will equal out.

Disadvantages

Most of the mutual funds charge management fees from two to four percent (loaded funds). There are also no-load mutual funds.
The performance of a mutual fund is highly dependent on the fund manager. Most mutual funds have not done as well as the S & P 500 index, an indicator of the stock market.

According to Lipper Analytical, in the last 35 years, only 33% of the mutual funds beat the S & P 500 index. In the last ten years, only 21% the of mutual funds beat the S & P 500 index. Nonetheless, a good fund manager such as Peter Lynch can beat the market most of the time.

There are thousands of mutual funds to suit each individual’s investment objectives. Mutual fund prices are listed in the financial section of major newspapers, and on the Internet. Click here for more information on mutual funds.

Now that we have looked at the different types of investments, we can see that stocks look the most promising for kids because they have the highest rate of return over time. They may go down for the short-term, but over time, stocks in solid companies will rise. Click here to learn more about stocks.