Mutual Fund Investing Basics
Have you been considering investing money in mutual funds but you don't know where to start? With several thousand mutual funds to choose from it can be a daunting task. Do not let this discourage you from investing in mutual funds. Over time, the stock market and mutual funds have proven to be a good long term investment. Sure they can go down, but the longer your time frame, the more likely it is you can succeed with mutual funds.
First, you should know exactly what a mutual fund is. A mutual fund is a professionally managed portfolio of investments such as stocks and bonds. When you buy a mutual fund share you own a little piece of every investment in the mutual fund's portfolio. If the value of these investments go up, the value of your mutual fund's share price will go up. The opposite holds true as well. If the investments go down, the mutual fund's price per share or NAV (Net Asset Value) will go down. The type of investments each mutual fund can invest in is specifically stated in the fund's prospectus. For example, an equity fund will usually invest in stocks while a bond fund will invest in bonds. Of course, there are mixed funds that can invest in both stocks and bonds. The type of mutual fund that is best for you depends on factors such as your age, risk tolerance, and investment goals.
Next, you should learn the main two advantages of investing in mutual funds. The first one is diversification. If you are just getting started in investing, a mutual fund allows you to spread your risk over many companies. By doing this you are effectively decreasing the likelihood of making poor investment choices. For example, if you were to only pick one or two stocks and either of them performed poorly your portfolio would almost certainly decrease. However, in a mutual fund, you own a lot of different companies so it doesn't matter that much if a few of the companies perform poorly. The other big advantage of a mutual fund is professional management. If you are unsure of what investments to buy yourself or simply don't have the time to do the research it is very helpful to have a professional do that for you. Of course, this professional service is not free. Each year a management fee is charged to the mutual fund. The percentage of the fee charged can vary from fund to fund so make sure the fee charged is "in line" with other mutual funds.
Now that you know what a mutual fund is and the top reasons to buy a mutual fund, you need to decide what type of mutual fund to buy. Do you want to achieve growth, income, or both? Do you want to invest in U.S. markets, foreign markets, or both? Do you want to buy a no-load fund, class A shares, or class B shares? All of these questions should be considered before making your final decision.