MUTUAL FUNDS
A mutual fund is a portfolio of securities purchased by a professional manager with the pooled resources of many private investors.
In addition to the cost of mutual fund shares, investors also have to pay fees.
“For the average investor, stocks are no easy road to riches.”
Two fundamental types of mutual fund are closed end and open end. Closed-end funds issue a fixed number of shares, which trade on exchanges like stocks. The price of shares depends not only on the value of the assets held, but also on the demand for the shares themselves. Shares in open-end funds are bought directly from the fund and trade according to customer demand.
“Investing is a plan, not a product or procedure.”
Most common types of funds:
- Balanced funds. These are a conglomeration of stocks and bonds, usually in a set proportion.
- Equity income funds. These invest in the stocks (equities) of well established companies that pay dividends.
- Income funds. These have the same goal as equity income funds, but they rely on more than just stock dividends to attain it.
- Growth funds. These invest in fairly established companies whose stocks offer long-term growth of equity rather than income, for all dividends are reinvested.
- Index funds. Index funds invest in the same securities tracked by stock indexes such as Dow Jones and Standard & Poor’s, the logic being that few managers can beat their performance.
- International equity funds. These invest primarily in foreign securities.
- Bond funds. These are primarily for generating income and offer little or no long-term growth.
- Sector funds. Also called single-industry funds, these invest in specific market sectors such as health care, energy, or telecommunications.
HOW TO ANALYZE MUTUAL FUNDS
- a mutual fund should meet an investor’s financial goal.
- Within any chosen category of fund, investors should compare fund performances over the short and long term, as well as in up and down markets.
- A fund’s loads and management and marketing fees should also be carefully assessed in light of both fund performance and investor objective.
- A lot of important information about a fund can be found in its prospectus.
Pros and cons of investing in mutual funds.
- Mutual funds are often attractive to people who are so preoccupied with their work on the left side of the CASHFLOW Quadrant that they have no time to oversee their investments.
- Shares, moreover, are liquid and can be purchased for relatively little money.
- Like stocks and bonds, funds can experience dramatic drops in value, particularly during a general market decline. In a good market, the very buffers that protect against loss can also limit gains. In a down market, investors can actually find themselves with taxable capital gains even though the value of their holding has dropped dramatically.
- Furthermore, loads, management fees, and marketing fees can be sizeable.
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