Mutual Funds for Beginners

How Mutual Funds Work

A mutual fund pools the money from investors in the fund to purchase securities including stocks, bonds and other investments. The fund then pays interest, dividends and profits on the securities to investors. Most mutual fund companies offer dozens of funds for all types of investment needs. Many funds offer online accounts and usually a phone call or visit to the fund website is all that's needed for the investor to open an account or request a portion of his earnings back. Most funds will also set up a link to your bank account for direct deposit or withdrawal.

The minimum cost to invest in funds varies from $250 to $10,000. Investors can also choose regular monthly investments from $50 to $100. In that case, many funds waive the minimum investment. Funds charge a small fee from the fund earnings to handle investors' accounts.

Many types of stock funds are available. An investor can choose to invest in large company stocks, small company stocks or a mix of stocks. Index funds track an index of stocks, like the Dow Jones Industrial Average, while managers of other funds attempt to "beat the market." Mutual funds offer better diversification than an individual investor could achieve. By investing in hundreds of stocks, the fund limits the risk of one stock going bankrupt. These funds aim to increase the value of the investors' fund shares, making a profit on the stocks held by the fund.

Bond funds are aimed at investors seeking steady income from interest payments on bonds. These funds offer regular interest payments. They may invest in U.S. government bonds, corporate bonds or tax-free municipal bonds. Balanced funds mix stock and bond investments, providing investment growth and regular income.

Money market funds offer a bit more interest than a bank savings account. Federal law requires the funds to invest in low-risk securities like certificates of deposit and Treasury bills. Unlike bank accounts, the funds are not insured.