If you are like most people you have heard of mutual funds, but are not really sure what they are. With so many different investment choices available to you, the more informed you are, the better your investment choices will be.
How is a mutual fund different from other investments? A mutual fund is an investment company that pools the money from its shareholders to buy dozens of different securities for its portfolio. This way investors can hold many more securities than they could investing on their own. By diversifying its assets across so many securities, a mutual fund also enables you to reduce your exposure to the risks of any one security.
People often want to know how many different mutual funds they should own. This depends on every individuals circumstances. There is no set number. They also want to know if they should invest in more than one fund family for diversification. No, it is possible to stay within a mutual fund family and be adequately diversified. Can a mutual fund be too large? Yes, but it can also be too small. The benefits of size depends on the segment of the market that the mutual fund operates in, as well as its investment style.
Should I switch out of a mutual fund if the portfolio manager changes? No. Monitor the fund closely to make sure the new manager is continuing the old manager’s style. Also make sure that any changes will not significantly affect your investment. Should I deal directly with a mutual fund family when purchasing a fund or go through the discount brokers that trade mutual funds? Discount brokers offer the convenience of buying different funds without going directly to each fund family and opening separate accounts.
You should always ask what the fund’s investment goal is. The funds goal should always match your own. If you invest primarily for growth, your goal is to increase the value of your investment over the long term. If you invest primarily for income, your goal is to receive a regular cash flow of earnings from your investment. If you invest primarily for stability, your goal is to protect your investment from loss.
Other questions to consider are what is the fund’s principle investment strategy? What types of investments does it make? How does it make these decisions? The fund’s investment strategy relates to its and your goals. The fund’s investment strategy is also closely related to its risks and returns.
Understanding risk is critical to being an informed investor. Past performance cannot predict future results, but looking at performance will give you a good idea how this fund behaved in different market conditions. To be a wise investor educate yourself before you begin investing. It can be a scary and confusing endeavor, but it can also be very rewarding.