If you are new to investing, you may have heard of mutual funds but do not know exactly what they are or how to select the right one. A mutual fund is a collective investment security, and there are many different types. It may consist of a mix of several different types of investment vehicles, such as stocks, bonds, or derivatives, or it may consist of nothing but stocks that are part of a certain sector of the economy, or it could be just bonds.
For example, there are mutual funds that consist of nothing but technology stocks. There are also funds that are comprised of stocks that have a similar market capitalization (such as mid-cap funds, large-cap funds, or small-cap funds). And some might contain several different types of securities (such as stocks, bonds, etc.) that all fall within the same risk classification (high-risk, medium-risk, low-risk).
Just like stocks, mutual funds have a price per share, also known as the Net Asset Value (NAV). The NAV is calculated by dividing the total value of the fund divided by the number of shares outstanding. As with stocks, the price fluctuates on a daily basis and it can be sold just like any other security.
When deciding what fund to invest in, you need to consider your investment goals. Are you looking for long-term capital appreciation, or would you prefer to receive immediate income from your investment? You also need to evaluate your risk tolerance. Are you willing to take a chance on a speculative fund to potentially receive a better return, or is capital preservation a high priority?
If capital preservation is your goal, then you should consider a mutual fund that consists of low risk equities and conservative bond and money market instruments. If you want a mix of investments, then you should look for a balanced fund. If you want explosive capital appreciation, then you should consider a high-risk common stock or high-yielding bond fund.
They are different than stocks when it comes to fees and expenses. As with stocks, funds are subject to capital gains taxes. But a fund is sometimes subject to a front-end and/or back-end load. If there is a front-end load, that means that a percentage of the initial investment is automatically deducted to pay for commissions to the fund. If there is a back-end load, the investor must pay a fee when the security is sold.
Also, there is a 12b-1 fee that is often deducted to pay for advertising expenses incurred for the marketing of the fund to the public. Sometimes there is no 12b-1 fee, it depends. Investors might be unaware of the 12b-1 fee because it is sometimes deducted from the share price, so in a way, it is an invisible fee.
I hope this introduction to mutual funds will help you make some decisions regarding your investments. There are literally thousands of different funds available, and brokerage houses often have their own set of funds that they create for sale to their customers. Talk to your broker and see if he or she can help you identify the best investment vehicle for you. Just make sure you review the fee structure of the mutual fund you are interested in before you invest.
If you know absolutely anything about investing, then you have probably heard of mutual funds. Once an obscure investment vehicle, they are now popular with almost all investors. If you ask your average investor whether they have any of their investment dollars allocated to a fund, they will likely answer yes. There are literally trillions of dollars of American money currently invested in mutual funds.
Funds have made investing for the average investor a little less complicated. A person no longer has to sift through stocks individually in the newspaper or spend hours watching the financial news on television. You can simply select a diversified fund that contains a bunch of different stocks of companies that fit into a certain paradigm, such as a fund containing nothing but small cap stocks, mid-cap stocks, large cap stocks, technology stocks, bonds, etc.
A mutual fund is really an investment company in and of itself, with a manager and other officers who administer it. When you buy shares, you are buying a portion of the holdings of the fund, which contains many different stocks and bonds within the portfolio. And, just like with individual stocks and bonds, your shares increase in value when the share price of stocks within the portfolio appreciate, or when interest payments are made on the bonds. As with stocks, you can sell your shares in a mutual fund at any time.
There are many different types of funds. They vary based on composition (stocks, bonds, or fixed income securities such as money market instruments), and strategy. Some funds, as already mentioned, invest in companies that have a particular market capitalization (i.e. large cap, mid cap, small cap). Other funds invest solely in foreign companies, while some invest in certain sectors within the economy, such as the financial, technology, or industrial sectors. Also, some mutual funds may pick companies based on ideology, such as a socially responsible or environmental fund. There are also index funds that simply invest in companies that are contained within a certain index, such as the Dow Jones, or the S&P 500.
The most important thing to understand when looking for a mutual fund is the cost structure. There are four expenses you need to review before investing. The first is the management expense, which is a charge assed on your money to pay the manager of the fund. The second is the administrative fee, which is usually assessed annually to cover the costs of mailings, postage, etc. The next fee is the 12B-1 fee, which covers the cost of marketing and promotion. And finally, there are sometimes front-end loads and back-end loads. A front-end load is a sales commission charged as soon as you open the account and invest your money. A back-end load, also known as a deferred sales charge, is assessed on your money when you close the account. Back-end charges vary depending upon how long you have had the account.
I hope this information has helped you to familiarize yourself with mutual funds. Try to set aside some money for investing and start while you are still young. The earlier you begin, the more money you can potentially make down the road. Carefully examine the fee structure and investment strategy before investing and you should do fine.
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