MUTUAL FUND

What is a mutual fund?

A mutual fund is a pre-packed collection of company stocks or bonds - or both - set up as a corporation. Companies represented in a fund may be in the same industry, or they may be diverse. Investors’ money is pooled together to purchase securities, and a fund manager monitors the performance of individual securities and the fund as a whole.

Price-per-share (PPS) is initially determined by the fund management. Once investors buy shares in the fund, the share values are reported on a daily basis. The PPS is based on the net value of the fund, divided by the number of outstanding shares.

Convenience

With many investors pooling their money, securities can be purchased at volumes many individual investors cannot attain. Also, because one mutual fund share represents investment in several companies, your investment is diversified. Investors also like the idea of having a professional manager assigned to each fund since many of us lack the time and expertise required to analyze and monitor the performance of all the companies included in a particular fund.

Mutual funds allow investors to buy and sell shares as they wish. Money market mutual funds allow you to write checks against your investment in the fund. Fees may apply to withdrawal or sale of shares.

Control

Mutual fund investors give up some control, however. Fund management may decide to sell off one company’s stock – a poorly performing one, for example - and include another in the fund instead. If you feel strongly about investing – or not investing – in a particular company, you may be better off buying individual company stocks yourself. You should thoroughly research funds before investing, and make sure you share the philosophy of the fund management.

Another way mutual fund investors relinquish control is in payment distribution. The timing of dividends or capital gains being difficult to predict, you may incur tax on such payments at inconvenient times.

Your investment goals

Many types of funds exist, spanning a wide range of growth and risk combinations. Much of the growth/risk ratio of a fund is determined by the make-up of the fund’s investment in stocks or bonds. Stock funds typically are more volatile than bond funds. Some funds invest in both to balance the risk and income potential.

What is your purpose in investing?

Do you want aggressive growth, which also comes with considerable risk of loss? An aggressive growth fund invests in companies with good potential for a high return, which is plowed back into the fund until a future specified date. Aggressive growth funds are for people interested in growing their future income, not living off dividends today.

Do you prefer steady, predictable income at a lower rate and less risk? A fixed-income fund may be for you. These funds focus more on generating predictable dividends than fast growth.

FAQ: What is the difference between "Load" and "Non-Load?"

A load fund charges a sales commission, which can be up to 'x' percent. A no-load fund, as the name suggests, charges no commission. There are also low-load funds, charging about a very low percent.

Dos and Don’ts

DO your homework: research is required to choose from among the  many available mutual funds.

DO make sure the fund philosophy matches your own, and that the fund you choose will help you meet your financial goals.

DO read each fund prospectus thoroughly, and make sure you understand associated fees and charges.

Don’t invest in a fund simply because it was recommended to you – at least not without researching it first. Everyone has different objectives for their investment dollars; no one fund is going to serve everyone’s purpose.

If you have a broker or financial advisor, he or she can advise you on mutual funds. So take the necessary time and start surfing for the information you’ll need to make an educated buying decision.