What is a Mutual Fund?
Mutual funds are diversified, managed pool of money. Many
customers put money into a fund that is pooled with other customer funds. With the pooled
money of many people, the fund manager buys stock in companies. Since clients money
is diversified amongst many stocks within the mutual fund, risk is minimized. There are
thousands of mutual funds available today, each with its own investment philosophy and
performance objectives. Before investing in mutual funds it is important to understand the
investment objectives of each fund and expenses associated with investing.
Load & No-Load Funds
Mutual funds come in two types, Load and No Load.
A loaded fund charges an upfront sales charge on whatever amount you buy. Commissions can
vary, but typically are around 3% to 6% on invested money. A No Load fund does not charge
a sales charge; therefore all your money goes to work for you immediately.
At first glance it may seem that No-Load funds are the
smart choice. This may not always be the case. Although Load Funds charge sales charge,
depending on the funds investment performance history, it may be worth the nominal sales
charge. Every mutual fund regardless of Load or No Load charges an expense ratio. This is
the amount of money each fund needs to operate and manage the portfolio. These fees vary
from fund to fund, and it is important to know what they are.
Closed-End & Open-End Funds
Two other variations in funds exist; these are closed-end
& open-end funds. Most mutual funds are open-end funds.
Everyday at the close of the stock market, open-end
funds are recalculated and receive a net asset value. The net asset value is the value of
the funds assets divided by the number of shares that people own.
For example: If at the close of the trading on the New York Stock
Exchange, a fund had a total net asset value of $10,000,000, and there were
1,000,000 shares outstanding, then each share would be worth $10. If you owned 1000
shares, your investment would be worth $10,000. Every day you can look up your mutual fund
in the financial papers and view the funds per share price. As the assets accumulate, so
does your investment. The reverse can also happen. If the funds assets decrease in value,
then your investment will also decrease.
A closed-end fund shares trade like the stock of a
company. There are a limited number of shares that can be issued and traded. In order to
purchase shares in a closed-end fund, there must be someone willing to sell their shares.
Just like stocks, a broker can place your order, and coordinate the buying and selling of
your shares. Because there may be a demand for a closed-end fund, the price per share may
not necessarily reflect an underlying value. The market determines the price of a
WHAT TO DO?
Regardless of your investment philosophy, there
is typically a mutual fund that has the same investment goals and investment
philosophy as you. Finding the right fund and matching your risk tolerance to the
fund's risk is vitally important. If you are a self-directed investor you can do the
homework by calling the different fund companies and asking for a prospectus. Your broker
can also supply you with the prospectus of most funds. Investing wisely is the surest road
to a sound financial future.