A mutual fund is a type of investment. It’s made up of a pool of funds including bonds, stocks and other financial securities and run by a money manager. The manager invests the money with the goal of making profits for the investors. The mutual fund is held in strict accordance with the terms outlined in the mutual fund prospectus.
One benefit of mutual funds is they give individual investors more clout and enable small investors to have access to diverse portfolios of different securities – something that would not be possible if they were investing alone. The group of investors share in the profits or the losses made by the particular fund. The other major benefit is professional management by an experienced money manager. It’s in the manager’s financial interest as well to do the best possible job for you.
If you are thinking of investing in a mutual fund, then seek out a good financial adviser to talk things over with first. They can help you decide which fund is best for you and if necessary discuss your current financial situation including cash flow, personal loans and any debt you may have.
When looking at funds a good idea is to compare individual funds with other similar funds. There are information resources where you can go to view ratings and other data relating to thousands of different mutual funds. This will help you make the best investment choice. Ratings are produced by ratings organizations such as Morningstar, Zacks, and Standard & Poor’s. Ratings can be listed from ‘excellent’ to ‘very weak’ or given similar alphabetic or numeric values.
The ‘excellent’ rating is based on a fund’s previous performance record. It is valued on this performance along with low levels of risk. This helps to give beneficial return on investment for the investor. Past performance is just a guide, however, and there is no guarantee for future return. Investors use this type of rating which suggests that this ‘excellent’ rated fund will give superior results. A ‘very weak’ fund is one that has been seriously under-performing making it a very risky investment based on its past behavior.
Two common types of Mutual Funds are closed-end and open-end. The closed-end fund only has a limited amount of shares available. To get them you have to have bought an existing share. An open-end fund has no limit associated with them and so you can purchase a new one at any time. Open-end funds are much more available than close-end funds.
Mutual funds have expenses associated with them – some low, some high. Make sure you find out the expenses and the value associated with the fund before you invest in it as this can affect your return. Expenses include loads, redemption fees and operating expenses. The load fee is paid to the agent who sold you the fund and can either be charged when you buy, or when you sell. Redemption fees are charged if you sell before a certain date. This is to prevent fund turnover. Operating expenses are fees you pay for management of your fund. Your fund prospectus will outline all of this information so read it carefully.