One of the easiest ways for the young investor to invest in the market is through mutual funds. Even if you don’t have a lot of money, you can still get a diverse portfolio by investing in mutual funds. This report will give you the lowdown on this type of investment vehicle.
In simplest terms, you can think of a mutual fund as a pool that brings together money from many different investors to be placed in assets like stocks, bonds, real estate and others. A mutual fund can be likened to a basket which holds a wide variety of assets where each investor owns a piece of the basket. The investors don’t really own the assets in the fund but the stocks, bonds and other securities that are in that basket are important for all investors because that is where the fund gets its value. If the securities do well then the mutual fund’s value increases. If they don’t then the basket’s value decreases.
Mutual funds are popular among retailer investors because it enables them to invest in a wide variety of stocks and bonds without having to shell out a lot of money. By pooling money together from many different investors, a mutual fund is able to invest in more stocks, bonds and real estate to make for a well-diversified portfolio compared to investing in them individually. Mutual fund companies hire managers to invest the money pooled together from various investors.
Now that we’ve already defined mutual funds, let’s answer the next logical question: How do mutual funds work? When you purchase a mutual fund, you’re really acquiring an ownership stake in the mutual fund firm. That single ownership stake is priced by its net asset value or NAV. If a mutual fund has a NAV of $100 and you invest $2,000 then you are getting 20 shares in that fund.
The fund manager hired by the company will then combine your investment with that of the other investors. All of those investments will be the assets of the fund which in turn, will be invested by the fund manager in stocks, bonds or a combination of both. The holdings of the fund will then serve as the portfolio of the fund.
You will know the type of securities that a fund invests in depending on its description. For instance, a small company stock fund basically looks for opportunities in the stocks of small companies. Equity funds, which comprise the largest types of mutual funds, are those that invest in stocks. If a mutual fund invests in global funds, then the fund looks for opportunities in funds that make investments outside your home country. There are also specialty funds that sacrifices diversification to focus in a certain segment in the industry. For example, sector funds invest in specific areas like healthcare, technology or financial services. Regional funds focus investments in a particular region in the world, such as Asia or Latin America. Index funds, meanwhile, mirror the performance of a market index such as the benchmark Standard & Poor 500 index or the Dow Jones Industrial Average or DJIA.
Mutual funds are popular investment vehicles because they provide a plethora of benefits. These are outlined below:
1. A mutual fund is managed by professionals.
One of the primary benefits offered by mutual funds is the benefit of having a professional money manager run the fund for you. As a young investor, this is most likely your first foray into the stock market and you are just building your knowledge. Mutual fund firms, meanwhile, hire experienced and educationally-qualified money managers to manage the fund. All you need to do is simply give them your money and they pick the investments for you.
Another advantage of having a professional do the job for you is that they have all the time to research the market and get the latest information about particular firms. Reading financial reports, understanding the political and economic issues faced by the country and assessing if a company is a viable investment or not and determining if it’s a good time to buy or sell—all these will be done by a fund manager to ensure that all shareholders get the best returns. That time is something that you don’t have.
2. It provides an easy form of diversification.
You already know that each mutual fund is comprised of securities from many different companies. Since the fund gathers your money together with that of other investors, they are able to invest in more securities, allowing each investor to own a piece of the stocks, bonds or other securities that the fund invests in. If you only had a thousand dollars to invest, for example, you will only be able to get a few shares in a company and will most likely be able to invest in less than 20 companies. Mutual funds, on the other hand, will allow you to invest in more firms with that same $1,000.
3. You don’t need a lot of money to actually begin to invest.
If you only had $50 to invest, some mutual fund firms will allow you to start investing for as long as you agree to a monthly investment arrangement for a particular amount. It’s really easy and affordable to buy into mutual funds even if you don’t have thousands of dollars to begin.
4. Buying and selling mutual funds is a cinch.
Buying and selling shares in a mutual fund is not a hassle. You can do the trade online or just call your broker to do it for you. There is no need to find a buyer if you want to unload your securities, the way you would with individual stocks. Rather, most mutual funds give daily redemptions. That means that if you want to sell your shares today, the mutual fund company will give you cash for it right away.
5. The law has put safeguards in place to protect mutual fund investors.
The government has passed certain laws like the Investment Company Act of 1940 which requires mutual funds to be regulated by the Securities and Exchange Commission. This law makes all investors of mutual funds owners of the company and as an owner, you have the ability to elect the board of directors who will run the fund. They will represent you, the shareholders, in ensuring that the fund is managed by honest and competent directors as well as see to it that you don’t overpay for its services.
Of course, this isn’t to say that these safeguards will really protect your investments. The lawsuits filed and cases that are already decided against some mutual fund firms will tell you that nothing is secure in the world of investments. Market forces will also play a role in determining the value of your fund. If the holdings lose value, then your fund will also lose value. However, for your mutual funds to really fall, all the companies in the fund’s portfolio would have to go bankrupt.
Since not all mutual funds are the same, you have to find a mutual fund that will meet your investing goals. Each fund has a particular investing style so you should choose carefully. Here are some tips to keep in mind:
1. Determine your goals.
When choosing any investment vehicle, you should always pick the funds in relation to your goals. There are more than 8,000 mutual funds in the market. To be able to determine which one to invest in, you should decide if you prefer to get long-term capital gains or you are investing to get current income. Will the income be used to pay for educational expenses later on when your kid goes to college or will it be used to supplement retirement? Whatever the reason, you should know what that is so you can pick the fund that will be in consonance with your goals.
2. Look at the fund’s fees.
Some mutual funds charge as much as 2% in management fees. That’s just too high. To break even, you will have to earn 2% as well. There are others who don’t demand very high fees. A mutual fund that does not charge a sales load is also something to consider. When looking at the literature of the fund, you should also check the expense ratio. If the number is high, then you can expect lower returns.
3. Research the fund’s historical returns.
Although you should not rely on a fund’s past performance, this can still be a good indicator of how well a particular fund would do in the coming years. In your research, determine if the fund manager was able to deliver results that were consistent with the general market. If the market generally performed well and the fund did not then you have to find out why. Compare the fund’s performance of that of the big indexes. If the fund exhibited more volatility then you might want to check out relatively safer funds.
No related posts.
No related posts.