Investing in Mutual Funds 0
A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests typically in investment securities (stocks, bonds, short-term money market instruments, other mutual funds, other securities, and/or commodities such as precious metals). The mutual fund will have a fund manager that trades (buys and sells) the fund’s investments in accordance with the fund’s investment objective.
Mutual funds have increased in popularity immeasurably over the past one hundred years. Though the mutual fund was seen primarily as an instrument for the rich at first, today they allow many average individuals the chance to earn a decent return on their money. Many people think of mutual funds as “products.” But when you buy a mutual fund, you’re actually buying an ownership stake in a corporation that in turn hires a money manager to invest its money. The price of a single ownership stake in a fund is called its net asset value, or NAV.
The fund manager combines your money with that of other investors. Together, those investments are called the fund’s assets. The fund manager invests the fund’s assets, typically by buying stocks, bonds, or a combination of the two. (Some funds buy more complicated security types.) These stocks or bonds are often referred to as a fund’s “holdings,” and all of a fund’s holdings together are its “portfolio.” A fund’s type depends on the kinds of securities it holds. For example, a stock fund invests in stocks, while a small-company stock fund focuses on the stocks of small companies. What you get as an investor or shareholder is a portion of that portfolio. Regardless of how much or how little you invest, your shares are the portfolio in miniature.
Mutual funds offer some notable benefits to investors.
They don’t demand large up-front investments.
If you had just $1,000 to invest, it would be difficult for you to assemble a varied basket of stocks or bonds on your own. For example, with $1,000, you could buy one share of stock from the largest U.S. company, then one from the next largest, and so on, but it’s likely that you’d run out of money sometime before purchasing your 20th stock.
If you bought a mutual fund, though, you would be able to sample many more types of stocks or bonds with that same $1,000. You can make an initial investment in several funds with just $1,000 in hand; $2,500 will get you into many more funds. If you invest through an individual retirement account, you can often get your foot in the door with even less than $1,000. You can even buy some funds for as little as $50 per month if you agree to invest a certain dollar amount each month.
They’re easy to buy and sell.
Whether you’re buying funds on your own or hiring a broker or financial planner to do it for you, funds are easy to buy. Once a fund company has your money, it often takes just a phone call or mouse click to buy shares in a fund. Of course, there are exceptions: Closed funds, for example, no longer accept money from new shareholders.
By the same token, it’s also easy to sell a fund. Unlike with many other security types, such as individual stocks, you don’t need to find a buyer when it’s time to unload your shares. Instead, the vast majority of mutual funds offer daily redemption, meaning that the fund company will give you cash whenever you’re ready to sell. Investors who own closed funds can also sell at any time.
They’re regulated.
Mutual fund managers can’t take your money and head for some remote island somewhere. Security exists through regulation set by the Investment Company Act of 1940. After the stock-market madness of the two decades prior to 1940, which revealed some big investors’ tendencies to take advantage of small investors (to put it nicely), the government stepped in to put safeguards in place for investors.
The fact that mutual funds are regulated shouldn’t give investors a false sense of security, however. Mutual funds are not insured or guaranteed. You can lose money in a mutual fund, because a fund’s value is based on the value of all of its portfolio holdings. If the holdings lose value, so will the fund. The odds that you will lose all of your money in a mutual fund are very slim, though — all of the stocks or bonds in the portfolio would have to go belly-up for that to happen. And history suggests that such a mass implosion is unlikely in the vast majority of fund types.
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