Mutual Funds

A detailed Summary of Mutual Funds

Mutual funds are an easy, convenient way to invest, without having to worry about choosing individual stocks. A mutual fund can be defined as a single portfolio of stocks, bonds, and/or cash managed by an investment company on behalf of many investors. The investment company manages the fund, and sells shares in the fund to individual investors. When one invests in a mutual fund, they become a part owner of a large investment portfolio, along with all the other shareholders of the fund. The fund manager invests the contributions when shares are purchased, along with money from the other shareholders. Every day, the fund manager counts up the value of all the fund's holdings, figures out how many shares have been purchased by shareholders, and then calculates the net asset value (NAV) of the mutual fund, which is the price of a single share of the fund on that day. If the fund manager is doing a good job, the NAV of the fund will usually get bigger and the shares will be worth more.

There are a couple of ways that a mutual fund can make money in its portfolio. A fund can receive dividends from the stocks that it owns. Also, the fund might have money in the bank that earns interest, or it might receive interest payments fr

Only 25 years ago, there were fewer than 500 funds available. Today, there are over 7,000, with more added every year. There are many advantages to buying mutual funds, but there are disadvantages as well. Mutual funds can offer instant diversification, and diversification reduces risk. For example, funds can reduce risk by spreading it among a large number of investments, if one stock performs badly, its impact on the overall portfolio is lessened. Funds can also reduce risk by investing in different asset classes: stocks (which can include international as well as U.S. stocks), bonds, cash and other securities. Many mutual funds can be purchased commission-free, reducing the overall impact of commissions and expenses on a portfolio. Also, by pooling money accepted from many investors, mutual funds can reduce the percentage that expenses eat up in a portfolio. Many investors strive to keep commissions as low as possible, but they can still take 3 to 5 percent of an investor's portfolio. Funds typically have expenses of about 1 to 2 percent. Of course, if a fund is bought through a broker who charges a commission, or if the fund charges a load, then these savings may be lost. Another advantage is that, mutual funds are a very liquid investment. Funds can usually be sold immediately and there's no need to worry about finding a buyer or at what price the shares might sell. Mutual-fund companies often offer a lot of attractive free services for shareholders, such as reinvestment of dividends and distributions, the ability to transfer between funds in a family, systematic investment or withdrawal plans to allow you to invest or sell on a monthly basis, and detailed record-keeping and tax reports.

Probably the biggest reason not to invest in mutual fund is, each year 80 percent of all mutual funds perform worse than average. One of the reasons for these low returns is that all funds have a variety of fees and expenses, which directly reduce the return. Some funds also charge

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Category: Miscellaneous