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Mutual Funds
Before you can have an intelligent conversation about mutual funds, you must have at least a basic understanding of stocks, bonds and how they are created and traded. This is necessarily a brief treatment of the subject, but will point you in the right direction if you are new to the concepts. Even if you know a bit about investing, it doesn’t help to review the basics once in a while.
Stocks are not just the pieces of paper that are issued to you, as they actually represent shares of ownership in a particular, publicly traded company. Not every company, of course, is a stock-issuing public corporation. Even some very large firms, like Mars Candy and Johnson & Johnson, are privately held. On the other hand, such public companies as Apple Computer, General Motors and Time-Warner issue stock that is traded on various “exchanges,” and these stocks are the most common equity (“ownership”) investments that are traded today, by both individuals and mutual funds.
Bonds and other investments
Bonds are the means by which you lend some of your money to either the government or, again, corporations, both public and private ones. Your goal is to receive interest, as well as recover your principle, after an agreed-upon length of time. Bonds are by far the most prevalent “lending” investments that are traded today, and are also invested in by individuals as well as mutual funds.
Of course, there are a great many other types of investments, too, such as gold and silver, insurance and annuities, commodities and real estate. However, the vast majority of mutual funds invest in stocks and/or bonds.
The basics of mutual funds
Mutual funds, simply put, are financial instruments that let a group of investors pool their funds to pursue an agreed-upon investment goal. “Fund managers” are responsible for investing these pooled funds into certain stocks and/or bonds, and ensuring the fund’s objectives to the best of their abilities. Investing in a mutual fund means you are buying a certain portion of the fund (“shares”), making you a “shareholder” of that fund.
Mutual funds are simple to invest in because you don’t have to do daily market research to pick which stocks and bonds to purchase. You are pooling your money with others, and entrusting it to the fund managers, who make the decisions on individual purchases and sales of specific stocks and bonds. The advantages go beyond relying on a professional money manager’s expertise, although this is a compelling reason by itself to consider mutual funds.
When they pool their money together in a mutual fund, investors can trade stocks and bonds with greatly reduced trading costs compared to what they would pay to do it alone. The biggest advantage of mutual funds, though, is the reduction of risk by spreading it among a number of investments. This is known as diversification.
Diversify and conquer
Allotting your money to various different investments is a wise strategy, which is why diversification is widespread. While some investments go down, others might go up, even for the same reasons or in response to the same news. Diversifying your investments dramatically reduces your risk, and doing it with mutual funds is smart – because you rely on the smarts and abilities of financial professionals.
Of course, you can accomplish a basic amount of diversification on your own by buying a number of stocks instead of just one. Mutual funds are design from the ground up to buy numerous stocks, even hundreds or thousands of different ones. You could spend weeks researching, studying and buying multiple stocks and bonds, but investing in a few mutual funds can be accomplished in an afternoon.
As with any other investment decision, do your homework and get input from trusted sources. One great advantage of mutual funds, of course, is that you are not going it alone, and are relying on the judgment of informed professionals. What you need to do, of course, is find out just which professionals are investing in the industries or opportunities that you are comfortable with, and then stay abreast of their funds’ results. Stay informed and you’ll maximize the effectiveness of mutual funds, as well as any other investments you make.
Topics: Investing |
