Do You Know These Mutual Fund Basics?
Despite a drastic economic downturn, it seems that mutual funds are still as popular as ever, with many people buying in through their retirement accounts or getting in at low prices. Mutual funds make investing fairly easy, compared to stocks. But one reason people lost money in mutual funds is that they didn't know the mutual fund basics they needed to keep money safe. Although mutual funds are often touted as being easy to invest in and virtually no-lose investments, we know that's not true, and learning more can help you avoid the losses we saw in the past year.
Mutual funds are everywhere, too - there are more than 10,000 different funds, and they've together amassed more than $4 trillion in investments! If you want to profit through mutual fund investing, you need to kow the basics and whether they are truly "safe".
Given that mutual funds have provided good returns in the past, no wonder they've become so popular. Until late 2008 and into 2009, investors expected these funds to supply diversification in one's portfolio, and to be fairly safe and post solid profits. It's true that they offer an easy way to diversify, and risk levels as a result may have been somewhat less than for individual stocks.
As a mutual fund is set up, the fund raises investment cash from investors, then uses that money to invest in stocks, bonds, and other securities that are a proper fit for the objective of the fund. Within the fund there is nearly always than a single individual investment. When the value of those investments goes up, or goes down for that matter, its investors also see a gain or a loss. When a fund pays out a dividend to shareholders, the investors get their fair share too. In addition, you can find that funds are well managed by professional advisors.
Mutual funds are designed as special types of corporations, which are allowed by charter to combine funds receied form investors, and invest that pool os cash for the whole group, based on the defined objectives of the fund. To raise investment capital there is an offering of shares of the fund to be sold to the general public, just as any public company wolud seek to sell stock on the market. Then the funds take the proceeds from selling shares and use it to purchase a variety of investments, such as stocks, bonds, derivatives, or money market instruments.
In exchange for their share purchase, shareholders receive equity positions in the mutual fund. As a result, shareholders then each own a portion of the underlying securities. Generally mutual fund shareholders may freely sell their fund shares on the market at any time, however this iwll be subject to daily changes in the share price and reflecting the performance of the underlying investments in the fund.
Some investors decide which mutual fund to choose based only on the performance of the fund or fund family within the past year or so. Some get their ideas from tips from a friend, co-worker or family member. Or, some buyers could be influenced by something they read in a magazine or on the Web. While these methods might result in buying a good fund, they are far from a sure thing. Actually, this is also a risky way to choose an investment, of any kind. Without any analysis of the fund's characteristics, it's hard to know if the fund is a good buy for that particular investor.
Each individual mutual fund has characteristics unique to it, such as its performance history, the philosophy of the management, specific investment objectives and so on. Your choice should be based on how you have designed your overall financial plan, and not just the past performance of the fund. It's best to determine your individual goals first, including your personal financial priorities, what investment resources you have available to invest, and how much risk you are comfortable with. You will also want to include a timeframe for achieving your goals.
It's always fun to talk about the high-flying funds and their performance returns, or then again, since the crash of 2008-2009, it's not as exciting as it once was. Nevertheless, it is a good lesson to understand that a fund's total return for the previous several months or years simply isn't a very good method for rating mutual fund performance. Whatever high returns a fund may have earned in the past, it only takes one down year for performance ratings to drop dramatically. Remember the old saying, past performance is no guarantee of future returns. Instead, determine which is the right fund for you by looking at other funds in the same category of investment, such as bond funds, growth funds, equity income funds, etc.
Also review the record of a fund's management team - whether they take steps to minimize loss of their capital, and whether they are continuing to provide solid performance. Use these mutual fund basics to analyze which investments, are a good part of your investment foundation. - 23208
Mutual funds are everywhere, too - there are more than 10,000 different funds, and they've together amassed more than $4 trillion in investments! If you want to profit through mutual fund investing, you need to kow the basics and whether they are truly "safe".
Given that mutual funds have provided good returns in the past, no wonder they've become so popular. Until late 2008 and into 2009, investors expected these funds to supply diversification in one's portfolio, and to be fairly safe and post solid profits. It's true that they offer an easy way to diversify, and risk levels as a result may have been somewhat less than for individual stocks.
As a mutual fund is set up, the fund raises investment cash from investors, then uses that money to invest in stocks, bonds, and other securities that are a proper fit for the objective of the fund. Within the fund there is nearly always than a single individual investment. When the value of those investments goes up, or goes down for that matter, its investors also see a gain or a loss. When a fund pays out a dividend to shareholders, the investors get their fair share too. In addition, you can find that funds are well managed by professional advisors.
Mutual funds are designed as special types of corporations, which are allowed by charter to combine funds receied form investors, and invest that pool os cash for the whole group, based on the defined objectives of the fund. To raise investment capital there is an offering of shares of the fund to be sold to the general public, just as any public company wolud seek to sell stock on the market. Then the funds take the proceeds from selling shares and use it to purchase a variety of investments, such as stocks, bonds, derivatives, or money market instruments.
In exchange for their share purchase, shareholders receive equity positions in the mutual fund. As a result, shareholders then each own a portion of the underlying securities. Generally mutual fund shareholders may freely sell their fund shares on the market at any time, however this iwll be subject to daily changes in the share price and reflecting the performance of the underlying investments in the fund.
Some investors decide which mutual fund to choose based only on the performance of the fund or fund family within the past year or so. Some get their ideas from tips from a friend, co-worker or family member. Or, some buyers could be influenced by something they read in a magazine or on the Web. While these methods might result in buying a good fund, they are far from a sure thing. Actually, this is also a risky way to choose an investment, of any kind. Without any analysis of the fund's characteristics, it's hard to know if the fund is a good buy for that particular investor.
Each individual mutual fund has characteristics unique to it, such as its performance history, the philosophy of the management, specific investment objectives and so on. Your choice should be based on how you have designed your overall financial plan, and not just the past performance of the fund. It's best to determine your individual goals first, including your personal financial priorities, what investment resources you have available to invest, and how much risk you are comfortable with. You will also want to include a timeframe for achieving your goals.
It's always fun to talk about the high-flying funds and their performance returns, or then again, since the crash of 2008-2009, it's not as exciting as it once was. Nevertheless, it is a good lesson to understand that a fund's total return for the previous several months or years simply isn't a very good method for rating mutual fund performance. Whatever high returns a fund may have earned in the past, it only takes one down year for performance ratings to drop dramatically. Remember the old saying, past performance is no guarantee of future returns. Instead, determine which is the right fund for you by looking at other funds in the same category of investment, such as bond funds, growth funds, equity income funds, etc.
Also review the record of a fund's management team - whether they take steps to minimize loss of their capital, and whether they are continuing to provide solid performance. Use these mutual fund basics to analyze which investments, are a good part of your investment foundation. - 23208
About the Author:
Looking for the best way to invest money in a down market? Jane Calhoun writes about how to invest in mutual funds in today's investment climate.
posted by X - Men @ 3:02 AM
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