Knowledge is power, especially when it comes to your financial future.
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Knowledge is power, especially when it comes to your financial future. Learn the basics and some of the complexities of investing and mutual funds through these educational resources.
Mutual Funds 101
Mutual funds have evolved substantially since investors first began using them centuries ago. The information below offers an overview of mutual funds to help educate you on the basic principles behind this investment style. For expert advice, please contact a financial professional.
What Mutual Funds Are And How They Work
How would an individual who is seeking to invest in a wide selection of stocks and bonds find the time and expertise to research, allocate, weigh and manage this kind of portfolio? Mutual funds are one of today's most popular answers to that dilemma.
A mutual fund is a collection of stocks, bonds or other investment securities that is professionally managed. In this case, the manager is essentially pooling money from a group of investors, creating a portfolio and managing it on their behalf. Each investor owns shares, which represent a portion of the holdings of the fund. When an investor buys a fund, their money is used to purchase new shares. Each fund has a dictated objective, which is outlined in the fund prospectus, and the manager will continue to buy and sell stocks and securities according to the intended style.
Part of the popularity behind mutual funds is due to their strengths and advantages:
- Professional Management: Mutual funds give retail investors the opportunity to have a professional manage their money. This is helpful when time and expertise is lacking.
- Accessibility: Mutual funds allow retail investors to access investments they might be able to on their own.
- Simplicity: Purchasing a mutual fund is relatively easy, and many do not require a large minimum investment. There are literally thousands of mutual funds out there.
- Diversification: Mutual funds, by definition, spread your investment amongst many assets, which may include hundreds of companies. In theory, this also spreads your risk out as well.
- Transparency: Mutual fund holdings are available to the public.
- Track Record: Funds maintain performance results and they are professionally audited to ensure accuracy.
- Liquidity: You can request that your shares of a mutual fund be liquidated at any time.
- Government Oversight: Mutual funds are registered with the SEC and subject to SEC regulation.
It's important to consider all the risks of any investment. Including loss of principal, investors should also be aware of the following:
- Fees: Mutual funds have lots of expenses, and most of them are passed on to the investors in the form of fees or sales charges. Fees vary widely from fund to fund.
- Taxes: Some mutual funds pass on capital gains to investors, which is a taxable situation. Not all mutual funds make these kinds of distributions in the same way, however, so it is important to find out before you purchase them.
- Professional Management: Managers are not created equal. Therefore, not all will perform up to expectations. And they still get paid even if the fund underperforms.