Learn To Know About Mutual Funds
June 23, 2009
Mutual funds are collectives of investor money that are managed and invested in underlying equities. A professional is hired to operate the fund, called the fund manager, and generally he or she is guided by a prospectus, which provides guidelines to what kind of investing the fund will do. The proceeds of the investments are passed along to each shareholder according to the number of shares they own, after expenses and management fees are deducted. Shares can be bought or sold at any time, at the price calculated at the end of the trading day. The arrangement generally allows investors to benefit from a more diversified basket of investments than they could assemble on their own, potentially including stocks, bonds, cash and commodities. A document called a prospectus outlines each fund’s investment mix, fees and expenses.
There are various classes of shares of each mutual fund available for purchase (a mutual fund may offer various classes of shares to investors — the differences are in the mutual fund fees and expenses of each share class). Several common share classes are: Class A, Class B and Class C. All share classes of mutual funds carry fees that are paid out of the fund’s assets to the fund’s investment advisors (as opposed to paying the advisor who sells the fund). In other words, investors see these fees as a reduction in their net returns versus an expense on their bank or brokerage statement.
There is a particular kind of mutual fund which should be of special note to the average investor, the index fund. These are funds in which the collective pool of investment money is used to buy weighted shares of a given index. There really isn’t much for the manager to do in these funds and so often his or her fees are very low. While index funds may not sound terribly exciting, over time they tend to outperform just about every other strategy. By investing in the stock market as a whole, you can lock in roughly the returns that the stock market will average. Believe it or not, over long periods of time this tends to beat just about every managed fund out there.
Ultimately there is much way about learn to know about investing in mutual funds, but for those who do not have much experience, it makes a lot of sense to start by looking at index funds. Before you invest a lot of time and energy into dissecting mutual funds, it can make sense to start with a baseline.
Comments
Got something to say?