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Tags: finance, stock mutual funds, investing in mutual funds
 Over the past few years, investors have increasingly turned to mutual funds to not only save for retirement but also in order to achieve their other financial goals. In the United States over 80 million people invest in mutual funds worth trillions of dollars. For most people, when you say investing they understand it to mean buying into this investment instrument.
And why not? It was, after all, heralded as a way for the small investor to get a piece of the action without having to spend time tracking stocks and bonds in the financial papers—just buy into a fund and you’re all set. Indeed, while mutual funds offer diversification and professional management, it’s not as simple as that.
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If you’re planning in investing in mutual funds, you need to know what it’s all about in order to get the most out of it while at the same time minimizing your risks. Mutual funds are a group of securities such stocks and bonds brought together into one collection. It is a company that pools money from different groups of investors and invests for them.
Each investor then owns shares in the fund, representing a portion of the holdings or portfolio. As an investor you can earn money in a couple of ways. One way is from stock dividends and/or the interests from bonds. Another way is if the fund sells its security holdings with a profit or capital gain.
These income streams are usually paid out to all shareholders in the fund in the form of distributions. At the same time, if the securities increase in value but are not sold, you can sell your share of the increased value portfolio to someone else at price higher than when you first came in.
You need to understand both the advantages and disadvantages of investing to help you in choosing the products that match your goals and risk tolerance. The advantages you get from investing in mutual funds are quite a few. First, you are assured that professional money managers run the fund by researching, selecting, and monitoring the performance of the securities that they purchase.
Secondly, you are not “putting all your eggs in one basket,” so to speak. You get the diversification that can spread out the risk of your investment. Because securities come from different sectors, even if one fails, there are still others to carry the burden. Thirdly, because securities are bought in bulk, you get to save in your investment because of economies of scale.
Portfolios will usually have lower money requirement for the initial purchases. Lastly, if you want to sell, you can easily redeem your shares at the portfolio’s current value. However, if there are advantages there are also disadvantages. One disadvantage is the fact that regardless if the mutual fund is making money in a transaction or not you still need to pay related fees and expenses.
These can include sales charges, annual fees, and even taxes. Also, as an investor you have no control over what is included in the portfolio nor what can be bought or sold. It is really up to the portfolio manager to decide what he sees is the best decision for the group.
At the same time, you don’t get real time pricing information as compared to individual stock ownership. Typically, the value doesn’t get posted until after the close of the trading day. Know also that mutual funds are not guaranteed or insured by the FDIC or any similar government agency. Even if you bought it from a bank, you’re out of luck if it loses money.
Also, past performances are not good indicators of future performance. While this may be so they can still help you assess the mutual funds volatility. Shop around in order to start investing in mutual funds.
About the author
The author of this article Rick Goldfeller is a successful underground Financial Analyst who has been advising and coaching individuals for many years. Rick recently published a book on how to manage your money and attract Wealth and Financial Freedom. More info on his Finance Planning course is available HERE.
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