Category: Investing

Choosing a Mutual Fund

As discussed previously, it is very important that you choose the right mutual fund, for several reasons. Firstly, you need to take into account its business model, as well as the fees and costs involved with holding stock in such a fund. Secondly, and probably more importantly, you need to define what your financial goals are, i.e., why you are investing in the first place.

You may want to put all your profits into your current account, in order to spend it on everyday expenses. This would be considered a s short-term investment. However, many people use mutual funds as a means of securing their long-term financial future, such as planning for retirement, or making a college fund for their child.

Depending on the reason for investing there are several different types of fund to choose from. If you needed cash for short-term spending, you would do well to invest in a money market fund. For spending in a few years’ time, bond funds are the best choice, and finally, for long-term investments, stocks funds are the best bet.

Types of Mutual Funds

Another important consideration when considering the type of fund you want to invest in is your risk tolerance. If you think you would be able to afford and cope with dramatic swings in portfolio value, for example, you may want to invest in stock funds instead of bond funds. If you are more conservative in your risk tolerance, the better choice would be investing in a bond fund. The most conservative choice is the money mutual fund, which is also considered to be something of an alternative to simply holding cash.

types of mutual funds

The other main aspect to choosing a mutual fund is actually finding one that suits you. Finding mutual funds has been simplified considerably by the advent of the internet. A simple Google search using the search term ‘mutual fund’ will yield millions of hits, and the most reputable funds will likely emerge among the top results.

There are also other online services and resources which may be able to help you with your choice. You can use sites such as Morningstar and Kiplinger to research mutual funds, since they carry a lot of information that is up-to-date and reliable. Also available is the Mutual Fund Education Alliance (MFEA), which is a non-profit trade association which provides search tools that allow you to find no-load funds.

Niche sites can also be useful, if you can find one that aligns well with your needs and investing philosophy. LipperLeaders, for example, is a company owned by Thomson Reuters, which evaluates funds on the basis of five metrics considered most important to the functioning of mutual funds. They call these metrics ‘Leaders’. They include the total historical return, consistency of returns, preservation of capital, expenses, and tax efficiency.

Buying Mutual Funds

Once you have found a fund that aligns with your interests, the next question is how the procedure for actually buying into it works? There are many ways you can come into possession of mutual fund stock. You could buy stock through a broker, a bank, an insurance agent, or a financial planner. These usually extract a fee in order to to this on your behalf, but if you want to avoid these, there are funds which also sell stock directly, and charge no fees to do it (other than the stock price, naturally).

There are also low-fee programs which offer stock in many different mutual funds in one place. These are often referred to as ‘fund supermarkets’, and they even offer record keeping services that keep track of all the purchases you made through them, even if you buy into different fund families. Some examples of ‘fund supermarkets’ include Schwab’s OneSource, Vanguard’s FundAccess, and many others.

vanguard funds

Once you have found a mutual fund you are interested in investing in, you should keep note of the share price. The share price for a mutual fund is calculated based on its net asset value (NAV), which is the fund’s assets minus its liabilities. NAV per share is the value of one share in the mutual fund, and this is the first number available to the potential investor when researching mutual funds. As any share price, the NAV per share fluctuates in value daily, as the holdings and liabilities of the company change.

What are Mutual Funds?

The basic definition of mutual funds is that they are managed portfolios of stocks and/or bonds. Another way we could approach defining a mutual fund may be to say that mutual funds are companies with lots of clients or shareholders whose money is accumulated and invested into shares and/or stocks with the aim of making a profit for the shareholders. The fact that the fund is owned by a lot of small shareholders is the reason they are called ‘mutual’ funds.

Mutual Funds vs. Individual Stocks

There is a fundamental difference between investing your money into a company’s stock, or buying bonds, and investing in a mutual fund. Firstly, buying stock in a mutual fund does not give you any voting rights, which you could use to influence the fund’s business decisions. Furthermore, stock in a mutual fund practically represents partial ownership of a wide array of different companies and their stocks.

Mutual Funds

The way in which an investor can profit from a mutual fund is also a bit different from owning regular stock. There are three main ways in which an investor can make money off a mutual fund. Firstly, the fund may invest in various companies on the shareholders’ behalf, and once profits are extracted from these investments, they get distributed to the shareholders according to their ownership of the fund’s stock.

The shareholders are usually allowed to decide whether they want to re-invest these profits by buying more of the fund’s stock, and thus gaining more of the profits in the future, or whether they merely want to pocket the money and keep their ownership percentage the same.

Secondly, the fund may also sell off some of its securities, if these have increased in price to an extent considered profitable by the fund managers, thus accruing a capital gain. Most of these gains are also distributed to shareholders in the same way as the above case.

Finally, if the holdings of the fund increase in value, the fund’s stock price will also increase. This is an opportunity for an investor to sell off some or all of their stock in the fund in order to make a profit. This works exactly the same as it would with any other company.

Naturally, as with any sort of investment, investing in a mutual fund has its benefits and drawbacks. Let us take a look at some of them so that a clearer picture of the essence of mutual funds can be formed. Let us examine at some of the advantages of mutual funds.

How Mutual Funds Work

Advantages of Mutual Funds

Firstly, the main advantage of mutual funds is arguably the fact that they are managed by professionals. This is important due to the fact that people with proper training and experience know how to pick which stocks and/or bonds to include in a portfolio in order to maximize the profits in a way that is safe for the investors. On top of that, a mutual fund may have more information on which to base these decisions, as opposed to a single small investor.

Another advantage of mutual funds is the fact that diversification is baked into the business model. Diversification is a very important aspect of any portfolio, since it allows you to minimize the risks associated with any particular investment, since you own a small amount of stock in many different firms, so if one of those firms goes bust, you end up losing relatively little money.

The fact that any given mutual fund has so many shareholders and owns such an array of stocks allows for the exploitation of economies of scale. Firstly, since mutual funds buy and sell large amounts of securities quite often, that means that the transaction costs are lower than those an individual would likely be required to pay to accomplish the same thing. Furthermore, when the money of many small shareholders is pooled together, it can allow the management to make much more aggressive and profitable investments than an individual would be able to.

Disadvantages of Mutual Funds

However, there are also disadvantages to holding stock in a mutual fund. Firstly, managed funds have not proven particularly effective in achieving higher rates of return for their investors than passive index funds, which track the stock market, in the last few years. Furthermore, the fees and costs of owning stock in a mutual fund are also considerable, and they can eat into an investor’s profits.

mutual fund fees

When we combine these two disadvantages, we arrive at the question of why we should invest in a fund which may not even beat the market, while managers get paid whether they win or lose? The answer to this question comes down to choosing the right fund to invest your money in.

Should You Stick With One Mutual Fund Family?

Mutual funds, as with any other investment opportunities which consumers choose to purchase, must be diversified in order for you to get the largest return on investments, and to be able to really make profits on your investment accounts. So, when you are considering where to purchase mutual funds, and whether or not to stick with only one company, the answer is definately not. You have to take risks, especially with products like mutual funds which are low in risk, therefore, your risk of loss is very small. So, when purchasing mutual funds, look into the top comapnies and diversify your portfolio with 2 or 3 of the best mutual funds out there.

To really make profits, you must be willing to take a few chances. You should not be foolish, you have to invest with companies that are the top dogs in the market, but you do have to diversify your accounts, and make sure that you spread your money evenly. Therefore, if one of the mutual funds purchases made doesn’t perform so well, you still have a couple others out on the table, which are still capable of briniging in returns for you, and maximizing your profits made.

How to Select the Right Mutual Fund For You

Everyone wants to find the right mutual fund that fits them. You should first consider seeking advice from a professional who knows what they are talking about. You can speak to an investment coordinator or even a financial advisor. You can also evaluate the fund’s past performance. This will give you may ideas of the fund that is right for you. You can narrow your search, and choose from the remaining. You can also explore the market and come up with many solutions. You can see which domestic or foreign funds are performing best. You can then make your choice from there. It all depends where you would like to get your information from. If you know how much of a risk that you are likely to take, you can make a decision from that. You should consider how quickly you would like to make money when determining the risks involved. It may be best to select a lower risk fund if you are someone who is new to this. You will have a longer time to let your investments grow way before you need to get into them. You have to weigh out your options when selecting the best.