Mutual funds are established to allow a group of investors to invest in many companies or firms. When you buy shares, you become a shareholder of that fund. The fund manager, in turn, invests the pool of money from its shareholders into a diversified group of securities.
These securities can include bonds, stocks, short-term money market instruments, other mutual funds, or commodities such gold, silver or platinum. These funds are, by nature, more diversified than some of the other investment choices simply because the risk is spread over a group of companies instead of just one.
The costs are also spread over the entire group of investors which allows you to achieve greater diversification at a somewhat lower cost.
Funds that have a higher turnover or that purchase and sell more securities typically have higher fees associated with them.
These costs include management fees, non-management fees (which cover things like transfer agent expenses, custodian expenses, legal and accounting expenses, etc.), and 12b-1/Non-12b-1 service fees which are contractual fees which a fund may charge to cover marketing expenses of that fund.
You’ll also need to factor in brokerage commissions which are separate. These are paid by each individual investor based on the type of brokerage account you set up.
Most mutual funds are organized as a trust or corporation and each fund has an investment objective. Most are also overseen by a board of directors or trustee who helps insure that the fund is managed appropriately.
Each fund has a prospectus. This is a legal document that offers information such as the securities which the fund invests in, description of the company, financial statements, information about the company’s officers and directors, and compensation details.
Mutual fund research is extremely important before deciding to buy. A company’s prospectus gives you a lot of the necessary information to do this research. You’ll also want to see what the experts are saying about the fund and check out its competitors as well. Sites like Morningstar offer lots of helpful information.
There are several types of mutual funds that are popular today. They include:
Usually no more shares are created and once they’re issued and sold, new investors can only acquire these shares on a secondary market. They are rarely sold at net asset value since the market influences their value greatly. These shares are not normally redeemable for cash or other securities until the fund liquidates.
There are two main types of UITs. They are stock (equity) trusts and bond (fixed income) trusts.
Stock trusts, like regular stocks, are designed to provide income through appreciation and sometimes dividends. Shares will be issued for a certain amount of time and then the offering period closes. At the termination date, the trust will be liquidated and the proceeds will be distributed to the shareholders.
Bond trusts offer a set number of units to investors and then the offering period closes. These trusts pay relatively consist monthly income amounts. The bonds within the trust typically mature at different intervals. As each bond matures the funds from the redemption is paid to the shareholders based on the number of units they purchased.
At that point the monthly income amounts are adjusted deducting the amount of each matured bond. This continues until all the bonds in the trust mature and are liquidated.
EFTs tend to be more efficient than traditional mutual funds since they are issued and redeemed in large blocks by institutional investors. This usually results in lower fees for individual investors.
These funds often attempt to “hedge” some of the risk that comes with certain investments using methods such as short selling (where a seller borrows securities, typically from brokers, sells them and replaces them with securities purchased at a lower price) and derivatives (financial instruments that derive their value from other financial instruments, events, or conditions).
In a lot of cases, hedge funds are only available to wealthy investors or professionals who meet the criteria set by regulators. Due to the selective nature of the investors, these funds are not usually subject to the same rules and regulations as traditional mutual funds.
Mutual funds can be purchased through a broker or sometimes through individual companies. The most important thing to remember is to do mutual fund research before purchasing shares in any fund. Also, familiarize yourself with all the costs involved with buying, selling and managing your investments.
Mutual funds can be a great addition to your portfolio. Research thoroughly, use common sense and grow your wealth with these diversified funds.From Mutual Funds to Investing Money