While investing in mutual funds is not the type of topic associated with lavish parties and celebrations – it is something that the serious investor should consider as a way to increase their net worth.
“But what is the EXACTLY mutual fund,” I hear you ask – “how does it work, who does what, and how much do they cost?”
Now stop, slow down – thanks one question at a time.
What exactly is a mutual fund?
Mutual funds are sold in shares to the public, which allows them to own different percentages of the fund depending on the amount they invest.
Pay more = own more. Own more = get more $$ again (in theory)
Shares, bonds, money market securities, and the like are bought through the assets of these mutual funds on the financial markets. Shareholders indirectly own the assets of the mutual fund, but the fund is managed by the investment company that finds the best way to achieve the highest return. (Indirect ownership of assets through these funds allows them to avoid the big tax hit.)
How does a mutual fund work?
Commonly, mutual funds are also known as open-ended investment companies. This means that they are constantly issuing new shares and buying back existing shares, but not all mutual funds are open. Some mutual funds are “locked” where they will no longer accept new investors.
The net asset value of a fund is the key concept to understanding how a mutual fund works. With this value, you can determine the value of a portion of the fund at any time. The market value of the fund’s assets minus all liabilities divided by the number of shares outstanding is the formula for understanding net asset value.
If you work through it, it will show you exactly what each share in the fund is worth when you want to invest in them. By comparing this number over time, you can see the percentage returns achieved. This is usually done for you on a fund website or any of the mutual fund websites that have statistics.
Who does what?
Mutual funds basically take your money, combine it with money from other investors like you, and then invest the total pool of money in investments with the best possible returns. Fund returns are then distributed to purchased accounts according to the number of shares each person owns. The fund managers then take their cut based on the fees they charge you and you get your return. These guys are worth the money they make you, so why not let them drive the car for a while and get the glory?
Various investment plans are a major part of this area, allowing investors to do so with a regular amount weekly, monthly, or however they want to set it up. Accounts that are constantly invested tend to have higher returns on average, but if you don’t have that option, you can still make money. Dollar-cost averaging should be your goal; it is the strategy of the best investment experts in the country.
How much do they cost?
Different mutual funds also have different types of fees included in them. Some will charge an upfront percentage of your investment (front load).
Some will charge you a percentage of the investment when they sell, this is a backup charge. Then there are unencumbered funds, which charge no more than annual operating fees. A person should look to use only the no-load funds as it saves a lot of your money. There’s really no point in using a loaded fund unless it’s giving you incredible returns. But you can usually find the same return at several different fund companies.
So go hunting, and compare not only price but also service and track record. And remember – the mutual fund is still based on the products themselves, the values of which can go up and down – so never invest more than you can afford without, just in case!!