Investing in a mutual fund is a favored approach used by investors
to save for retirement and to diversify into a professionally managed
asset base. A mutual fund is a company that pools the collective proceeds
from many investors and allocates the money to assets such as bonds,
stocks, and money market instruments. The total constituents of the
fund are known as its portfolio. Shares or units represent the proportionate
ownership granted to holders of the fund and their entitlement to
income generated by the fund. This is known as the net asset value
per share (NAV) and is a daily calculation determined by the total
value of the fund divided by the number of outstanding shares.
Mutual funds do not carry FDIC protection and incur entry and exit
costs. Investors that are planning to invest in a mutual fund need
to consider these costs and the anticipated duration of the hold.
Investment returns can be eroded considerably by ongoing management
fees. Mutual fund investing, therefore, is more appropriate as a
longer term investment vehicle. If you are considering a short term
investment, exchange traded funds might be more suitable. These
funds trade the same way as stocks, and can be used to go long,
short or as a hedge. They do not incur entry and redemption fees
and transaction costs are minimal.
Mutual funds invest in many different classes of securities. This
can include cash, stocks and bonds. They can also focus on small
cap, middle cap or large cap securities. They can also concentrate
on one particular industry or sector. These are known as sector
funds. Mutual fund investing can be used to gain exposure to domestic
securities or foreign markets and securities. International funds
are great for investors that want to diversify into offshore holdings
to take advantage of economic growth and exposure to emerging markets.
Mutual fund holdings are continually adjusted by mutual fund portfolio
managers. The cost structure for maintaining mutual funds is typically
higher and reflected in the management fees. These funds are also
subject to regulatory, accounting and tax rules. They are not subject
to taxation provided they distribute derived income to the shareholders.
You can purchase mutual funds through insurance companies, banks,
brokers, investment advisors and discount stock brokers. Prior to
investing in a mutual fund, it is prudent to do some research to
discover which avenue is the most cost effective. Charges and costs
can vary considerably.
