What are mutual funds?

So what are mutual funds? Well, they are just another way for you to invest in stocks, without having to take on the risk of investing in individual stocks. Whether you are investing for retirement, or just starting out investing, a great strategy is to invest in mutual funds. There are several advantages to investing in a mutual fund over individual stocks. For one, risk is spread among many stocks, representing a wide variety of sectors and markets. So mutual funds are well diversified.

Two, a fund manager actively monitors the stocks within the fund and buys and sells as the funds need to be rebalanced, or if the fund objectives change. So, people who don't have the time or the inclination to actively manage their own stocks can leave it up to the manager of the fund. And three, investors with only small sums of money can invest in companies they may not be able to otherwise.

What kind of mutual funds are there?

Mutual funds come in just about every theme and level of risk there is. Typically mutual funds are grouped as follows:

• By market cap - (size of company)
• By strategy (value, growth, growth and income)
• By sector (technology, industrials, financials, etc.)
• By location (international, US, emerging markets, etc.)

They can also be index funds, which is basically just a mirror image of an index (i.e. the Dow, S&P 500, Russell small cap, etc.).

How you can invest in a mutual fund

Investing in a mutual fund is very similar to investing in individual stocks. First you need to do a little research to figure out which funds you want to invest in, then you need a broker account to buy your shares. You can either make a one time purchase, or you can also set it up so that if you want to make regular contributions (for example perhaps you want to invest $50 every paycheck), you can schedule this to be automatically sent from your bank in many cases. So, all in all it's pretty easy to invest in a mutual fund.

For more information on the best place to open an account with the lowest mutual fund transaction fees, be sure and visit the Free brokers page.

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