“Whatin the world are mutual funds?”
Investing can be very scary and frustrating due to the new concepts and because you are turning you nest egg over to someone you may not even know well or at all. The key to having a successful investment plan is to become familiar with all types of investments and strategies in which to use them
One of the most popular investment vehicles used today is the mutual fund. They offer investors a way to prepare for the future in a simple, accessible and affordable manner. According to the Investment Company Institute, the number of mutual funds that are available to investors more than triples the number of individual stocks on the New York Stock Exchange. When you put your money into a mutual fund, it is pooled with money from other investors who have similar invest goals. A professional money manager then invests the money into a variety of securities that will help the fund achieve its stated goals. A mutual fund can be made up of any number stocks, bonds, or a combination of the two.
Diversification is central to having a balanced investment portfolio. No single investment performs well under all market and economic conditions. Owning a variety of securities smooth’s out the ups and downs that are sure to happen in the market. Diversification also helps to lower the risk in your portfolio by offsetting losses from some investments with gains in others. Mutual fund managers choose investments from different security types, countries, industries and/or market cap.
Mutual funds are run by professional money managers. That is one of the key advantages to owning mutual funds. The securities in the mutual funds are selected and monitored by professional money managers. These professionals have extensive experience in the securities markets and are constantly researching the dynamic conditions of individual industries and the overall economic environment. Professional money managers strive to ensure that the securities within the mutual funds accomplish the stated objectives of the funds. Managers may change the portfolio mix based on the results of their research.
Mutual funds are loaded with convenient features as well. They are very liquid investments, which means you can sell all or some of the shares on any day the market is open. The minimum required investment is relatively low compared to other investment vehicles. In some cases, you can invest as little as $25 a month. With the ability to invest a set amount of money on a regular basis allows you to dollar cost average. Dollar cost averaging is a technique designed to reduce market risk through the systematic purchase of securities at predetermined intervals and set amounts. The variety of mutual funds that are available allows you to invest for almost any need or circumstance.
“Is that thing loaded?”
A sales commission, also known as a load, is the charge investors may pay when purchasing shares of a mutual fund. Not all funds charge a sales commission. Mutual funds can be divided into three groups, front-end, back-end, and no-load funds.
When purchasing shares of a front-end load fund (also known as A-shares), you pay a one time charge that is deducted from the initial investment. The charges range from 3 percent to 8.5 percent of the initial investment. Sales charges are reduced for large purchases or as you accumulate larger balances.
Back-end load funds do not charge an upfront fee, but have higher expenses over a longer period of time. Furthermore, if you sell your shares within a specified period, a sales charge will be assessed. The amount of the deferred sales charge decreases over each year until it disappears. Theses funds are also called B-Shares.
Generally you would buy no-load shared directly from the issuer’s sales force without any form of added sales charge. However, some have service fees. No-load funds usually do not have share classes.
Why on Earth would anyone buy a fund with a load?
Most load fund groups distribute their mutual funds through investment representatives. The investment representatives help the clients determine which funds would best fit their needs and risk tolerance. They also advise the clients when to buy, sell or change to another fund. Representatives receive a portion of the investment commission charged by the mutual fund group in return for their advice and services.
No-load groups distribute their funds directly to investors through toll-free numbers, leaving investors to make their investment decisions on their own. Even though the no-load funds do not charge a commission, they are not free of charge. The funds have to pay for all of the marketing campaigns used to promote the fund. These expenses are deducted from the fund each year as part of the funds operating expenses, which lowers the funds overall annual investment returns.
Mutual funds offer different commission structures; investors can choose the one that best suits their needs. There are many important factors that must be considered when choosing a mutual fund. One of the most important is the annual return net of all fees. If you can narrow you chooses down to a few mutual funds that are very similar in risk and style, you should choose the fund that has the highest return net of all fees. If the no-load fund out-performs the loaded funds choose it, however if you the loaded fund still has a higher return after all if the fees have been deducted it is your best choice assuming all thing equal otherwise.