What Most Investors Don't Know About Growing Wealth With Mutual Funds

Mutual funds are a professionally managed investment program, funded by shareholders, whose funds are invested in stocks, shares and other securities. Originally touted as a way for the little guy to get a piece of the market with the help of professional investors, more than half of the households in America are now invested in them.

How they work

Each investor owns shares in the fund and can potentially earn income from dividends paid out on stocks and shares, or from interest paid on bonds. Income is normally distributed annually and if the fund sells a particular security it should distribute any gain on that too. If the overall fund value increases, you can sell your shares for a profit.

Risks

That’s the theory anyway, but unfortunately, mutual funds haven’t always delivered. Although you get professional management, this sometimes isn’t as good as it should be. Diversification should spread your risk, but sometimes too much can dilute the overall gain. The costs of actually running the fund also have to be taken into account. All investment carries risks and the higher the chance of reward, the higher the risk is likely to be.

What to look for

You therefore need to decide what risk/reward ratio you are comfortable with. Fixed income bonds usually provide a steady income and are primarily invested in government or corporate debt. These tend to be for the more conservative investor. Not all bonds are the same and high-yield junk bonds are very risky. Stocks and shares can be even more so, depending on the types of company invested in. Newer companies may have high potential growth but greater risk, whereas solid large scale businesses may be safer but expensive to invest in - unless bargains can be found for those that are out of favor.

Advice

You may want a balanced fund, a high risk, or very conservative fund that provides steady growth with some income. With so many diverse options available you should work with your financial advisor to find funds and

investment styles that suit your needs.