Mutual Funds are a type of account that hold stock in a various number of companies. You purchase shares of the mutual fund and your money goes into an account from which the mutual fund manager purchases shares of actual companies.
Mutual funds usually (but not always), focus on sectors or groups of stock, such as small-cap, large-cap, or alternate energy for example.
What is the benefit of mutual funds?
First, it allows you to diversify and insulate yourself from exposure to any single company. For example, several years ago, had you bought Enron before its collapse you would have lost all your investment. However, if you owned a mutual fund that had Enron as a holding, only part of their portfolio would have suffered. You would have still lost money, but not nearly as much.
Second, a mutual fund employs a team of people who have the job of researching companies and determining the best ones to invest. The school of thought is that you do not have to do research, they have done the research for you.
What is the downside of mutual funds?
If a whole sector is going down, then the mutual fund will most likely go down as well. For example, if you buy a fund that focuses on internet stocks and that sector declines, your shares of the mutual fund will lose value as well. We saw this with the internet bubble in the early part of this decade.
Because mutual funds are providing a service, there is a cost associated with them. For example, there are costs with particular investor transactions, such as investor purchases, exchanges, and redemptions. There are also regular fund operating costs that are not associated with any particular investor transaction, such as investment advisory fees, marketing and distribution expenses, brokerage fees, and custodial, transfer agency, legal, and accountants fees. Some funds cover the costs associated with an individual investor’s transactions and account by imposing fees and charges directly on the investor at the time of the transactions (or periodically with respect to account fees).
Where can I find out information about a mutual fund?
Many mutual advertise heavily in magazines and on television. If you are interested in a mutual fund, call the company and ask for a prospectus. This provides all the information you need about a particular mutual fund. It will have information ranging from the fees charged to the companies that are held in the mutual fund.
Finally, the are many different ratings for mutual funds, but the most notable is Morningstar. If a fund has a good Morningstar rating, such as 4 star or 5 star, the fund will usually advertise or market this.
Mutual funds usually (but not always), focus on sectors or groups of stock, such as small-cap, large-cap, or alternate energy for example.
What is the benefit of mutual funds?
First, it allows you to diversify and insulate yourself from exposure to any single company. For example, several years ago, had you bought Enron before its collapse you would have lost all your investment. However, if you owned a mutual fund that had Enron as a holding, only part of their portfolio would have suffered. You would have still lost money, but not nearly as much.
Second, a mutual fund employs a team of people who have the job of researching companies and determining the best ones to invest. The school of thought is that you do not have to do research, they have done the research for you.
What is the downside of mutual funds?
If a whole sector is going down, then the mutual fund will most likely go down as well. For example, if you buy a fund that focuses on internet stocks and that sector declines, your shares of the mutual fund will lose value as well. We saw this with the internet bubble in the early part of this decade.
Because mutual funds are providing a service, there is a cost associated with them. For example, there are costs with particular investor transactions, such as investor purchases, exchanges, and redemptions. There are also regular fund operating costs that are not associated with any particular investor transaction, such as investment advisory fees, marketing and distribution expenses, brokerage fees, and custodial, transfer agency, legal, and accountants fees. Some funds cover the costs associated with an individual investor’s transactions and account by imposing fees and charges directly on the investor at the time of the transactions (or periodically with respect to account fees).
Where can I find out information about a mutual fund?
Many mutual advertise heavily in magazines and on television. If you are interested in a mutual fund, call the company and ask for a prospectus. This provides all the information you need about a particular mutual fund. It will have information ranging from the fees charged to the companies that are held in the mutual fund.
Finally, the are many different ratings for mutual funds, but the most notable is Morningstar. If a fund has a good Morningstar rating, such as 4 star or 5 star, the fund will usually advertise or market this.