Investing in Mutual Funds
February 13th, 2008 by admin
In turbulent times like we are seeing today, it is nice to have an investment vehicle like mutual funds to help investors manage risk. A mutual fund is a company that pools money from many investors and invests the money in stocks, bonds, short-term money-market instruments, other securities or assets, or some combination of these investments. The combined holdings the mutual fund owns are known as its portfolio. Each share represents an investor’s proportionate ownership of the fund’s holdings and the income those holdings generate.
Buying mutual funds has many advantages to the average investor. First, it is easier to build a diversified portfolio through mutual funds than it is to buy individual stocks to do the same. You also benefit from the professional management of the fund. That said, it is critically important to understand what you are buying and who is managing the fund. Fortunately there are many resources to help. Here in Charleston, SC we even have a radio program, The Mutual Fund Show, on 94.3 FM that helps make sense of mutual funds.
Mutual funds are run by professional managers identify stocks, research their risks and prospects, and monitor their performance. To do that on a portfolio of 10 or more stocks would likely prove to be time prohibitive for the average investor. Mutual funds are quite liquid and provide a low cost of entry in building a diversified portfolio.
Funds often specialize in a certain kind of investment. Some focus on certain types of stocks such as growth or large capitalization stocks. Other focus on bonds and yet another group called money markets focus only on short-term, high-quality investments issues by state, local and federal governments.
You can earn money from your mutual fund investment in three ways:
- Dividend Payments - A fund may earn income in the form of dividends and interest on the securities in its portfolio. The fund then pays its shareholders nearly all of the income (minus disclosed expenses) it has earned in the form of dividends.
- Capital Gains Distributions - The price of the securities a fund owns may increase. When a fund sells a security that has increased in price, the fund has a capital gain. At the end of the year, most funds distribute these capital gains (minus any capital losses) to investors.
- Increased NAV- If the market value of a fund’s portfolio increases after deduction of expenses and liabilities, then the value (NAV) of the fund and its shares increases. The higher NAV reflects the higher value of your investment.
With respect to dividend payments and capital gains distributions, funds usually will give you a choice: the fund can send you a check or other form of payment, or you can have your dividends or distributions reinvested in the fund to buy more shares (often without paying an additional sales load).
There are many factors to consider in purchasing a fund such as cost, risk, and tax treatment. Research your choices carefully, review the fund prospectus and even talk to your advisor before making a fund purchase.
Based out of Charleston, SC, the author writes a blog on investing topics. Read more at http://charlestonmoney.wordpress.com
For any potential readers in or around Charleston, SC, the author recommends The Mutual Fund Show, on 94.3 FM to helps make sense of mutual funds.
Posted in Mutual-Funds |