Understanding Mutual Funds

You can buy individual stocks and bonds through investment firms which are full service or discount brokerages. If you go this route you have to determine if you have the knowledge and desire to pick and choose individual securities and if you have the time to follow them and make timely changes. You can consider working with a stockbroker. Do your homework to be sure you have the right advisor for your specific needs and comfort levels. You also have to determine if you have enough assets to diversify your portfolio.

A consideration when you are starting out is to look at mutual funds. There are thousands of mutual funds with very varied investment goals so again, do your investigation to make sure you get a fund that has been around and has a track record to fit your needs.

You want to understand the basics of mutual funds so let’s take a look at them. Simply put, a mutual fund is a company that makes investments on behalf of its shareholders. The fund pools your money with the money from many other people who have similar investment objectives. Professional money managers then take the pool of money and invest it in securities, such as stocks, bonds and money market instruments.

Mutual funds can make money for you in two ways. They can pay dividends earned from the funds’ investments and if a security held by a fund is sold for a profit, the fund can pay capital gains.

As a shareholder, you own a proportionate share of a fund. Each share represents ownership in all the underlying securities. Funds pay dividends and capital gains in proportion to the number of fund shares owned. Therefore, if you invest $1,000 you’ll get the same rate of return as if you had invested $10,000.

Your best protection against risk is diversification – spreading your investment(s) across dozens of securities instead of just one. Remember the old story about ‘all your eggs in one basket?’

Mutual Funds provide as assortment of individual options. They offer growth, income, domestic and international securities and combinations of all these. Typically, a mutual fund can have from 50 to hundreds of securities. Only the most affluent investors can attain the diversification on their own that a mutual fund can do for their shareholders.

With mutual funds you have built-in professional money managers who base their buying and selling decisions on extensive, ongoing economic research. After analyzing stock market conditions, interest rates, inflation and the financial performances of individual companies, these managers select investments that best fit the fund’s objectives.

Mutual funds create the possibility of higher long-term returns than conventional savings. Of course, performance varies from fund to fund, but on average and over the long term, the growth of stock funds has paralleled the growth of the U.S. economy.

Mutual funds are easy to buy. You can buy them on line or thru a professional investment representative who can help you analyze your specific financial needs and objectives. You can start with as little as $500 and make subsequent additional investments of as little as $50 with an automatic investment plan. 

Mutual funds are flexible in that you can usually switch from one fund to another within the funds family of funds. If you start out wanting growth you can choose those funds and later you want to change to income producing securities, you can change within the funds family of funds. You can also have the fund reinvest all gains and interest or have them send you a check.

I hope this has been informative. If you have questions or ideas you would like to share with us please drop us a line and we will be glad to get back to you.