Mutual Funds, Always Working Both Ways
A mutual fund is an investment where a company/organization/etc pools yours and other investor’s funds, makes various investments, and then
periodically pays dividends. Mutual funds come in many varieties, so it is important to do research on how you want your investment handled.
Congrats, It’s a Share!
As an investor of a mutual fund, you are now a shareholder. This means that once you invest, you have no control over the investments made, will face deficit to your share value when the fund does, and reap dividends when the fund makes profits. Mutual funds are managed by an external hire and the investment strategy is advertised to attract investors. The collection of investments is labeled the portfolio and can include stocks, money markets, etc. The fund manager will choose which investments to comprise the portfolio of depending on the risk/yield strategy, ultimately based upon the type of mutual fund they are hired to manage.
The shares of a mutual fund are not valued the way stock shares are, based on supply and demand. Instead, mutual fund shares are purchased and sold based on their Net Asset Value (NAV.) The NAV is calculated according to the closing value of the funds securities divided by the number of shares.
There are two forms of mutual funds in regards to the market and amount of shares that can exchange hands. They can include:
Open-Ended: Fund investors are allowed to purchase and/or sell more shares to and from the mutual fund as there are no set number of shares. New shares are calculated using the current net asset value and cashed in when the investor sells shares.
Close-Ended: There are a limited number of shares distributed and investors can only sell shares once the fund is terminated. This type of fund is different in that these shares can be bought and sold on the open market, and with the limited amounts, subjects them to supply and demand.
There are different components of mutual funds depending on the level of risk an investor would like to take. Mutual Funds generally fall into one of three categories:
I. Stock Funds (a.k.a. Equity Funds): A mutual fund made up of stocks offers the highest potential return because it carries the highest amount of risk. The volatility of the stock market leaves the widest range of possible return or loss. There are a few different types of equity funds such as sector and income funds.
II. Bond Funds (a.k.a. Fixed Income Funds): Moderate risk and return type of fund made up of bonds. Since there are such a big variety of bonds, there are different levels of risk, making research on the specific types of bonds being invested in extremely important.
III. Money Market Funds: Offering the lowest risk and return, these types of funds are required by law to invest in short-term, high-quality investments only issued by U.S. corporations or government and tend to keep a Net Asset Value of $1.00/share.
Balanced Funds: Type of mutual fund that invests in both bonds and stocks to offer part secure, low risk and part moderate risk investments. Again, lower risk means lower return however in this type of fund the investor does not gamble their entire portfolio.
Reading the Fine Print
The salesman/woman that you buy the fund through makes a commission for the sale of the mutual fund. This is referred to as the load. There are two options when it comes to this:
Load: A charge added to the mutual fund for its purchase/sale that covers the fund manager’s commission. This sales charge is generally less than 10% of the selling price and can be paid at the time of the fund purchase (front-end load) or when the investor sells the mutual fund (back-end load.)
No Load: When buying a mutual fund without the help of a salesman/woman, there is no load! This extra saving, paired with a smart investment strategy, can maximize your potential earnings
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