Mutual funds are investments that include a range of securities. Investors purchase the fund by pooling their cash. The fund may comprise bonds, stocks, or a mix of different investments and is usually run by an investment manager. The fund may be a part of an underlying index like the S&P 500 or constructed for investment in a specific range of securities or stocks like technology or bank stocks.

Mutual funds aren't only for young or novice investors. They are employed by professional investment managers and experts across the globe. Here are the top benefits of mutual funds as the ideal investment option for people in their 20s or just beginning investors:

Simplicity

Most of those in their 30s or 20s do not have complex financial requirements. Mutual funds are simple to study and purchase. Many brokers offer a variety of funds as well as the option to set up an automatic direct deposit of your pay every pay period to purchase shares in the fund. This makes them a great choice for new investors.

Diversification

You may not know which companies or industries to invest in as a novice young investor. This makes mutual funds an ideal choice since they have dozens or even hundreds of securities. A young investor can start and perform very well using just two or three funds.

Diversification is a feature of many mutual funds, which reduces the risk of losing. For instance, if one company's stock is underperforming, the other stocks may not be affected, providing protection against the risk of market volatility. But, there is the risk of losing in mutual funds, like various other investments.

Investment Goals in Your 20s

If you're in your early 20s, it's beneficial to identify your goals for your financial plan and investments and whether your investments are in the near-term or long-term.

Budget

It is essential to create a budget based on each month's income and expenses. The budget will assist you in determining the amount you're able to afford to invest.

Emergency Fund

A few of your short and long-term goals may include establishing an emergency savings fund. A savings or money market account will store the money allotted for your emergency fund. The money could be used for unexpected expenses, such as repair to your vehicle or loss of employment, or medical costs.

Major Life Expenses

The major expenses you will face over 5 to 10 years may include purchasing a house or beginning a family. A home is among the largest investments you can make. Determine how long from now you'd like to have a house or have a child and begin saving now to pay for the down payment, which usually ranges from 10 percent or 20% of the home's purchase cost.

401(k) Employer Match

If possible, sign up for a retirement plan or 401(k) with your employer. These plans offered by employers can offer match-ups to your contribution up to a specific percentage of your earnings. For instance, you may need to contribute 5 percent of your earnings to be eligible for a match of 5% by your employer.

Best Fund Types for Investors in Their 20s and 30s

If younger investors have saved for a longer-term target, such as retirement, it is possible to have a time horizon of up to 30 years or even more. Every investor must know their individual goals for investing and their risk tolerance. However, the longer you're required to spend your funds, the more aggressively you can invest.

Target Date Mutual Funds

As the name suggests, the target-date mutual fund invests in a mixture of stocks, bonds, cash, and stocks that assume the person will invest for a specific year. When the target date is near, the fund manager will gradually reduce the risk of market volatility by shifting assets from stocks into cash and bonds. This is something that an investor could do on their own. Therefore, mutual funds with a target date are a kind of "set it and forget it" investment.

Balanced Funds

Balanced funds are also known as "hybrid funds" or "asset allocation funds." They're mutual funds that invest in a balanced asset allocation consisting of bonds, stocks, and cash. The allocation is usually fixed and is based on a specific investment goal or style.

Index Funds

People in their 20s who want to build or invest in an investment portfolio should consider index funds. They can be described as mutual funds which track the performance and composition of an index like the S&P 500.

Index funds are ideal for young people because they give a wide range of exposure to equity markets and low cost-to-income ratios. These funds will expose you to dozens or hundreds of companies within a single fund, offering an inexpensive, diverse mutual fund.