- A mutual fund is a large portfolio of investments. Typically, they are a collection of stocks and/or bonds, though a few funds include other securities, real estate or precious metals. Investors receive the profits the fund earns relative to the size of their investment. They also get the benefit of a diversified (and, therefore, lower-risk) investment that's guided by a professional fund manager.
Mutual funds are a good first investment for many people because most require only a modest initial deposit ($1,000 is typical), and you may add money in small increments, usually $50 to $1,000. With the exception of money market funds, the majority of funds can be categorized based on share structure, how fees are assessed or by investment strategy. - Mutual funds can be open- or close-ended. Shares of an open-ended fund are issued as investors put money into the fund. When someone liquidates his shares, the fund buys them back, or redeems them. The price of a share is based on net asset value (NAV), which is calculated by dividing the fund's total assets by the number of shares outstanding.
In a closed-end fund, only a limited number of shares are issued, much like stocks. Closed-fund shares are usually not redeemable. Instead they are traded on exchanges and the price is determined by market forces rather than the NAV. - Mutual funds charge fees to cover expenses, such as management salaries and administrative costs. These fees are summarized by the fund's expense ratio, which is the percentage of the fund's assets that go to pay for operating expenses each year. Funds that charge only for operating expense are referred to as no-load funds.
Load funds, on the other hand, levy a sales commission that is deducted from the money investors put into the fund or from what they receive when liquidating their investment. Load funds may also charge an ongoing 12b-1 fee of up to 1 percent per year to cover such costs as marketing expenses and broker commissions.
Disclosure of all fees can be found in the fund prospectus, along with other information, such as the fund's performance history and management's track record and investment philosophy. - Mutual funds have different investment strategies based on the fund's goals. Growth funds attempt to maximize equity appreciation by investing in stocks the fund manager believes will grow in value. Some aggressive-growth funds take more risks to generate higher returns and may include stock options in the portfolio. Income funds are aimed at generating a steady cash flow for investors and typically invest in bonds or conservative stocks that pay high dividends, such as utility companies and preferred stocks.
- A money market fund is a mutual fund that operates under special SEC rules. To qualify, a fund may invest only in short-term corporate or government bonds with average maturities of not more than 90 days. Another distinctive feature of money market funds is that investors have ready access to their money and may even write checks on the account as long as they maintain a minimum balance. Like conventional bond mutual funds, some money market funds specialize in government bonds where the earnings are exempt from some taxes while other funds concentrate on higher-yield corporate bonds.
- Advertisement -
- Advertisement -