“What is a mutual fund ?” one may ask. Mutual funds are a collection of stocks and or bonds assets under the management of professional asset managers. They seek to make money for their investors who own a specific number of shares, corresponding to the amount of money they invested in the fund. There are an estimated 7,000 mutual funds in the markets; most of them fall within the category known as no-load mutual funds.
Mutual funds offer some advantages through the expertise offered by their professional managers. The process of investing in mutual funds begins with the identification of the mutual fund strategies suitable for the investor’s needs. This article explains all the basics of mutual fund investing so a new investor can fully understand. Mutual fund investing is not as complex as it may appear
Mutual funds may be bought directly through the companies or through brokers’ banks, financial planners or insurance agents. New investors may directly purchase their mutual funds through the various mutual fund managers; if fund holdings increase in price, the fund’s shares will increase in price as well. Third-party mutual fund purchases may also include a fee or a load for their services. All mutual funds have costs that lower investment returns, so investors should shop around before investing. The Securities and Exchange Commission has a cost calculator that may be used to compare associated costs of buying a particular mutual fund.
Mutual funds earn their income from stock dividends, derived from the appreciation of the prices of the stock included in the fund portfolio. Another source of income for mutual funds is interest payment from bond purchases. Mutual fund companies pay out nearly all of their received income back to the investors in that particular fund. These payments are forms of distribution payments made to fund investors, generally on annual basis.
Profits realized due to increases in the stock prices of the companies in a particular mutual fund portfolio are known as capital gains when these stocks are sold., and these capital gains are passed on to the fund’s investors during the distribution process. When the fund’s holdings increase in value but for some reason the manager decides not to sell them, the fund’s shares increase in price. Any investor in the fund may sell her shares and realize a profit as well. When you sell your mutual fund shares, you have two options: requesting a check from the fund company or reinvesting your money. In this case, the investor gets more shares as a consequence.
Types of Mutual Funds
Mutual funds are divided into many different groups, depending on their investment philosophy and trading strategies. For instance, mutual funds-which aspire to deliver income to their investors-may be classified as income funds. These groups of funds tend to invest in not-too-risky stocks, which may deliver consistent dividends to investors. Another group of mutual funds, categorized as growth and income funds, may focus on stocks that deliver dividends as well as identify stocks with significant growth potential.
Aggressive growth funds seek out mutual funds with the greatest potential for growth. This group of mutual funds is considered the riskiest of all mutual funds. Value mutual funds invest mostly in undervalued stocks; sometimes these funds are valued much less than they are actually worth. Like aggressive growth mutual funds, value funds are also generally higher-risk.
No-Load/Load Mutual Funds and Qualifier
There are two categories of mutual funds: load and no-load. Load mutual funds charge fees and commissions that are generally used to offset the cost of distribution services performed by third-party agents. These charges are made initially at the time the investor makes that purchase. On the other hand, some funds may not charge any commissions when a new investor buys into the fund. These categories of mutual funds are known as no-load funds. In this case, the investment company itself pays the cost of distribution services such as share distribution.
Potential mutual fund investors must understand that mutual funds are not guaranteed or insured by the Federal Deposit Insurance Corp. or any other government agency. A mutual fund investor can lose their money through such an investment. The present performance of any mutual fund company can’t be used as a gauge of future performance. Mutual fund past performance can help investors understand the level of volatility in that particular mutual fund. All prospective mutual fund investors should research and investigate the management of a fund you may be considering to invest in. Now that you have armed yourself with all you need to know about the basics of mutual funds, go ahead and contact a good mutual fund manager and start investing your money, the mutual fund managers would do all the work for you.