For individuals just getting involved in the game of investing, there is a lot of wonder circulating around mutual funds. Certain questions such as, What are the risks associated with mutual funds? and Are they a good investment? are questions that are frequently asked amongst investors. However, it is good to ask these questions because asking questions about mutual funds shows that a person means serious business when it comes to investing. All investors want the best return they can possibly get on their investment, so exploring the many options available are important. When it comes to mutual funds, there are many options. That is why it is good to know at least the basics.
The basics
Mutual funds consists of money from many different investors that is pooled together and invested into short term money markets, stocks, bonds, various other assets or securities, or maybe even a combination of any of these. Each investor owns a portion of the holdings that the fund possesses and the income that is generated from these holdings.
There are several factors that distinguish mutual funds from other types of funds. Those factors are:
The shares are purchased from the actual fund instead of from other investors via such avenues as NASDAQ or NYSE.
The purchase price is the price per share plus any fees imposed by the fund at the time. These are commonly referred to as shareholder fees.
When selling the shares, you are selling them back to the fund.
New investors are accommodated through the creation of new funds that can be sold to them.
Investment advisors that are registered with the SEC are typically who takes care of mutual funds.
Advantages and disadvantages
There are advantages and disadvantages to mutual funds. The advantages include:
Diversification of your portfolio This is important in investing because a diversified portfolio has better earning potential.
They are affordable There is a high degree of affordability when it comes to mutual funds. Dollar amounts can be set low for purchases, giving lower income individuals the ability to invest.
Managed professionally There are professionals who are constantly monitoring the performance of these mutual funds and always looking for the best investments for the fund in order to maximize its return to its investors.
Liquidity Investors are able to redeem their shares at the current NAV. This is in addition to any fees or charges assessed at that time.
The advantages make it clear that a mutual fund can be a great investment, but like any type of investment there are some disadvantages that come along with them as well. Those disadvantages include:
There are annual fees, charges for sales, and other fees associated with them. It doesn't matter how the fund performs. These costs still apply. Taxes also have to be paid on gains. This refers to any distributions received even if the fund performed poorly.
Investors do not control their shares. The make up of the portfolio is decided by the manager of the fund.
There is uncertainty that surrounds the price of shares. It isn't like how you can follow regular shares of stock in real time during trading hours. There is a delay in you finding out what your share is within a mutual fund since you are sharing the fund with other investors.
So now that you see the advantages and the disadvantages, you can decide which way to go. However, you have to weigh them against each other. An example: Although you don't have control, the fund is under professional control. Mutual funds have helped put money in people's pockets, so mutual funds can be a great way to invest for your future. Just make sure you find a fund that performs well.
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