Understanding how your investments work is a critical element of your financial success. If you don’t understand the basics, you could become victim to schemes and scams. Even if things don’t go that wrong, it’s still important to understand investing ABCs in order to maximize your ROI (return on investment). Millions of us invest in mutual funds, either through a company-sponsored retirement plan, on our own, or with the help of a financial planner. But how many of really understand how they work? Here are 10 steps to understand how mutual funds work.
1. What Are Mutual Funds?
Mutual funds are groups of investments, like stocks and bonds, which are owned by groups of investors rather than by a single investor. A professional money manager decides which investments should be bought or sold. Mutual funds got their name because they are “mutually funded,” that is, investors pool their money together to buy the investments that go into the funds.