From saving for a downpayment on a house to investing for retirement, mutual funds are a great way to get started with investing.
What is a Mutual Fund?
A mutual fund is an investment that pools money from many investors, and that money is used to invest in stocks, bonds and other securities. One mutual fund share includes a portion of a share of each stock held in the fund's portfolio.
Who Decides What a Mutual Fund Invests In?
Mutual fund managers decide what securities to buy or sell guided by the mutual fund's objectives. If a mutual fund's objective is to invest in the energy sector, the manager cannot buy shares in technology stocks. Fund objectives let you know what to expect now and in the future.
What is NAV?
NAV, or Net Asset Value, is the market value per share of a mutual fund. A mutual fund's NAV is determined by taking the closing market value of securities owned by the fund plus other assets such as cash, then subtracting liabilities the fund has incurred, and dividing this result by the total number of shares held by investors. Most mutual funds post the NAV after the market closes, but some mutual funds are calculating intra-day NAVs.
Why Invest in Mutual Funds Instead of Stock?
You can invest in both mutual funds and individual stocks, but mutual funds are particularly useful in some cases.
- Diversification: If you do not have a lot of money to invest, creating your own diversified portfolio to spread risk will be difficult. Diversification is automatic in mutual funds.
- Time: Successful investors take hours every week to analyze their holdings, stock market conditions and to educate themselves further on investing. Mutual funds are a wise choice for those who lack the time to follow stocks so closely.
- Experience: Consistently investing well takes a few years of experience and learning from mistakes and successes. If you are not experienced with trading stocks but want returns over and above what a savings account offers, investing in mutual funds is a good way to grow your personal assets.
What Can a Mutual Fund Invest In?
Money Market Funds hold short term investments,typically with better interest rates than savings accounts or CDs. Considered very safe and liquid. Write checks on the balance in a money market fun and close the fund at any time.
Bond Funds invest in bonds issued by a corporation, a municipality such as a state, the U.S. Treasury securities, etc. Bonds funds can also classified as short term, intermediate or long term, depending on when the money borrowed on the bonds must be paid back. Bond funds have more risk than a money market fund but not as much risk as a stock fund.
Stock Funds come in many varieties:
- Large Cap, Small Cap and Mid Cap Funds invest in large (blue chip), medium and small companies.
- Growth funds invest in companies expected to grow quickly.
- Value funds invest in stocks that appear to be out of favor but have financials and long term plans that may bolster the stock price.
- Regional funds invest in companies in a particular part of the world.
- Sector funds invest in a portfolio of stocks in one market sector, such as transportation or technology.
Although professionally-managed, mutual funds are not risk-free. You must decide which mutual funds fit your personal investment objectives, and you need to examine a mutual fund's past record. Read annual and quarterly reports and check the performance of mutual funds you own at least monthly.
Learn more about choosing mutual funds that match your savings goals.
