7 Things You Need To Know About Mutual Funds

One of the best ways to build wealth over time is through investment in the stock market. However, these investments can be dangerous for many people for one major reason. Investing in the wrong stock can cause you to lose your entire investment. If a company goes bankrupt, its stock’s price is likely to go to zero or some low number that’s close to it. When people lose money like this, it causes others to have some major concerns about the market as a whole.

This is where mutual funds can come in handy. Funds are effectively a basket of stocks. They hold many different companies within them, which provides for instant diversification for regular investors. Rather than losing your whole investment if a company goes bankrupt, you will likely lose less than 5 percent of your investment, most likely a great deal less, if you hold your investment in a mutual fund.

Most funds will hold tens, if not hundreds, of companies within them. It is likely that a company or two will go belly-up over time, but it is highly unlikely that they will all lose all of their value at one time. This is one of the major benefits of using mutual funds as investment vehicles. Here are some other areas to consider when putting your finances toward mutual funds.

1. Know Management Tenure

Each fund will have a manager or a group of managers who are given the task of selecting the appropriate investments for a given mutual fund. Some funds will have a lucky year and show market-beating returns. They might also have a new management team. It’s a good idea to look into how long the manager of your prospective fund has been in his or her position. Those with long track records of success should be more attractive to you as an investor than someone who has only been working with a given fund for a year or two.

It’s possible that a given manager will move from one fund to another. Therefore, you’ll want to look at this person’s entire body of work. With search engines like Google and Yahoo!, this process has never been easier. Just type in the individual’s name and click search, and any wide variety of articles and pages will come up to show you how long a manager has been in business and how successful they’ve been. Be sure to search for quality in this regard, or your returns might lag behind those of the market as a whole.