With thousands of mutual funds from which to choose, which ones are the right ones for you? What are the characteristics of a mutual fund worth investing in? How do I go about investing in mutual funds? In this Chapter, we answer these questions and many more, including the following:
· Types of Mutual Funds
· Mutual Fund Styles
· Types of Mutual Fund Fee Structures
At its most basic level, a mutual fund is an investment vehicle that holds other investments. A mutual fund pools money from many investors and purchases different securities on their behalf. Investors own a share of the mutual fund proportionate to their investments and share proportionately in the fund’s gains and losses. A mutual fund is managed by one or more professional money managers. The job of the fund manager is to manage the fund within the parameters of the fund’s prospectus. These managers often work for a large company such as Fidelity or Vanguard. The fund company’s job is to monitor the fund’s performance and be accountable to the investors.
There are several key attributes that make mutual funds extremely popular among individual investors:
· Diversification: A single mutual fund often invests in hundred of individual other investments. For example, Fidelity Magellan invests in 210 different stocks with 31 percent of its portfolio in the top 10 stocks. Therefore, by investing in Magellan, you are effectively investing in 210 individual stocks for as little as your $2,500 initial investment.
· Professional Management: Through investing in a mutual fund, you are using the services of a professional money manager. For example, Bob Stansky has been managing portfolios since he joined Fidelity 1983. By investing in Magellan, investors get access to his 20 years of experience managing money.
· Liquidity: Although any stock or bond investment you are likely to invest in will be sufficiently liquid, a fund is required to redeem shares for the market value of the securities within the fund. Unlike stocks or bonds, you can sell fractions of shares of a fund. Although funds are liquid, you can generally only buy or sell shares of a mutual fund at the close of the investment day. For example, if the market is increasing during the day and want to get in on the short-term gain, you will miss out since your purchase will be effective as of the close of the investment day.
· Convenience: Mutual funds can be purchased via the internet, by mail, or over the phone. In addition, many mutual fund investors choose to “dollar cost average” whereby they invest incrementally each month directly from their paycheck or checking account. In addition, you often find mutual funds in retirement accounts and 401k accounts.
· Small initial investment: Since the initial investments and subsequent investments are often as low as $1,000 to $2,500, they are ideal to add to incrementally each month.