Q. My friends say I should invest in mutual funds, but I don’t really understand what a mutual fund is. Can you explain how they work and why I might want to invest?
A. Although mutual funds have been around since the late 1700s, the oldest mutual fund currently in existence was started in 1924. They have increased in popularity over the last century and are the primary investments available in many 401(k)s, health savings accounts, and 529 college savings plans. A mutual fund is best thought of as a group of investors banding together to hire a professional manager to invest their money. However, a mutual fund is actually a legal structure distinct from other similar funds, such as hedge funds, and is heavily regulated by the government to help ensure appropriate disclosure and accounting practices to protect the general public. Due to this regulation, compared with many available investments, they are quite safe from the risk of the manager running off with your money. Of course, mutual funds still carry the risks of the underlying investments, such as stock market risk for stocks and interest rate risk for bonds.
Mutual funds provide significant benefits that most individual investors should find very attractive. The first is professional management. By investing through a mutual fund, you are no longer responsible for making day-to-day investment decisions, buying and selling individual securities like stocks and bonds, monitoring the investments, or calculating returns. In fact, you can go away to a deserted island for years and know your money is continuing to be responsibly invested.