MUTUAL FUNDS

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 client’s 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.

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.

Closed-End Funds

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 closed-end fund.

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.