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.
