One of the best aspects of mutual funds is that with each investment, there is instant diversification. Diversification is important for all investors because it reduces risk. It is important to take risks when investing because without risk, you won’t make very much money.


For example, putting your money in a traditional bank account has little to no risk (as long as it is within the $100,000 FDIC insured), but at 1% or less, you will make next to nothing. You do need to take risks when investing. The younger you are, the more risk you should take.


Diversifying your investments eliminates a lot of the unnecessary risk that comes with investing. If you invest $100,000 in one company and it loses 5% for the year, you just lost $5,000. If instead you invest $20,000 in 5 different companies and they earned -5%, 2%, 16%, 8%, and 9%, you would have made an average return of 6% and made $6,000. It wouldn’t be as big of a deal that you lost 5% because you gained in the others.


Mutual Funds Work through Diversification


Mutual funds are able to include hundreds of investments in stocks, bonds, currency, and other securities. How are they able to include such a wide array? Essentially, you are buying tiny pieces of each investment. You would not normally be able to do this with a brokerage firm, but the unique aspect of a mutual fund allows you to do just that.


A mutual fund takes a large group of investors. Each investor is interested in investing in a certain type of investments. The mutual fund collects to money from the investors and uses it to purchase many shares of whichever stocks they choose. They then turn around and issue a share of the mutual fund to the investor containing many pieces of other stocks.


If you were wealthy, you would easily be able to invest in many different companies and have someone manage your portfolio for you. Unfortunately, most of us aren’t very wealthy, and we must start small. Mutual funds are the perfect solution because they protect your investment by instantly diversifying your portfolio.


If you want to start investing money now, but you don’t know much about investing, you should try mutual funds. Even if you start learning and studying up on how to invest, you can invest in your own stocks later, but still start investing now so you start earning money as soon as possible.