Financial Answer Center

When you purchase shares in a mutual fund, your dollars are invested in a large number of shares of many companies all at once, and your investment risk is spread out over many stocks of many companies, not just one. With mutual funds, your risk could be less because you are more diversified.

Mutual funds make it easy for you to invest in stocks and bonds. The two main advantages of investing your money in mutual funds are: 1) You receive professional money management; and 2) you are able to truly diversify your holdings with a relatively small sum of money.

Each mutual fund has one or more fund managers who are skilled in the principles of money management. They normally have access to large databases of research.

Each fund also has a particular objective. That objective is defined in the fund's prospectus. The objective could be long-term growth, current income, or a combination of income and growth. For example, the objective of XYZ fund is long-term growth. To accomplish the fund's objective, the fund manager invests the money received from its shareholders by purchasing shares of many individual companies that, in his or her opinion, have the potential for growth over time. The manager may also leave a small portion of the fund in cash. Some stock mutual funds can own shares of stock from a few hundred companies, thereby limiting their holdings in any one company to no more than 5–6% of all the assets in the mutual fund. This is true diversification, and your risk is less than if you invested in just one or two individual stocks.

You do not need a lot of money to get started in a fund. Some funds let you start with very low minimums.

One good way to invest in mutual funds is to have money automatically deposited from your checking account into the fund. This gives you the benefits of dollar-cost averaging and also ensures that you stick to your investment program.

Cash and bond mutual funds are the most appropriate as your child gets closer to college age. The blended funds (stocks and bonds) and stock funds are most appropriate when college is years in the future and you have a long-term investment horizon.