Home Members Tools Credit Cards
   

  • Mutual Fund Basics

    Mutual funds are the investment of choice for many people; they allow an investor to minimize financial risk by spreading money among many different stocks and bonds, without the research and market knowledge required for such a diversified portfolio.

    By diversifying their investments, they are able to invest in the stock market without taking the risks involved in having money in only one or a few companiesí stocks. Mutual funds may invest in stock of hundreds of companies, allowing the investor to spread his money around and minimize the possibility of loss. The idea is that if one company the fund invest in takes a nosedive, the other companies that are still strong will balance it out.

    It doesnít take much investment capital to get started in mutual funds; many fund companies have a lump sum requirement of one thousand to twenty-five hundred dollars, but you can often get around that with as little as fifty to a hundred dollars a month if you have it automatically withdrawn from your checking account.

    The money you invest will be pooled with other investorís money to purchase shares in the mutual fund. Investors are charged a fee based on a percentage of their investment to pay to have a professional fund manager research, buy, and sell stocks.

    Fees can vary widely among different funds, itís a good idea to carefully research any funds youíre considering, and give extra thought to funds with lower fees. A one percent difference in fees may not sound like a big deal, but over the long term it can amount to many thousands of dollars, which is extremely important when it comes to retirement planning.

    Income or Growth?
    There are many mutual funds available - choose a fund that serves your needs. The younger investor whose financial goal is many years away normally benefits from a growth fund. A growth fund invests in stocks in fast growing companies; the fund manager chooses investments that they believe will appreciate in value over time, making your investment worth more.

    Aggressive growth funds are riskier than growth funds, but can bring bigger rewards if you are willing to ride out the ups and downs of the stock market over the long haul. Growth mutual funds are used for long range capital gains so you can one day cash in your investments for your dream home or the kidís tuition.

    Some funds are managed to provide investors with income, which may be ideal for retirees and people who need additional income. You must have investment capital to buy enough shares to make the income received beneficial to you; a small investment wouldnít give you enough income to cover much of your living expenses.

    About twenty-five thousand dollars invested in income funds would be a minimum general guideline, just to give you a rough idea, but of course, the more you have invested in income funds, the more income can be generated. Income funds invest in bonds that pay interest, and value stocks that pay dividends, which are distributed to the investor. Income funds pay out to the investor, so they wonít appreciate much in value compared to growth funds.

    Some funds strive to give a combination of growth and income. They normally invest in stocks that are expected to grow, as well as bonds or stocks that pay out dividends. These funds will not grow as much as a growth fund or pay out as much as an income fund, giving you a diluted version of each.

    While these types of funds may be ideal for some investors, you should carefully consider how these types of funds might affect your tax situation. You will have to pay capital gains taxes on dividends, even if those dividends are automatically reinvested. Those taxes will immediately reduce your net profit. Unless you have this type of fund for your tax-deferred retirement account, be very careful about investing in a growth and income fund, and be aware of the possible tax consequences.

    Simplified, the ideal retirement strategy is to invest aggressively in growth funds in your early years and gradually shift to more conservative growth funds as you near retirement. When youíre ready to retire, you can put some of your money away very safely, such as in a money market account, and invest some of your money in income producing funds.

    The key is to start your retirement planning early! A person who starts investing at a young age will have time working for them and will reap more rewards by investing far less than someone who gets into the game just a few years before retirement.

    Read the Prospectus!
    Different mutual funds have different goals; itís important for you to know the objectives of any fund you choose. The prospectus gives detailed information about the fund, and should be requested before you decide to invest in that particular fund.

    The prospectus will tell you about the risk involved in the fund, what fees are charged, past performance, and what types of investments are made, as well as how those assets are allocated. Past performance is not a guarantee of future performance, but it can help you spot a potential problem if that fund canít keep up with similar funds in similar markets. Be sure to compare funds with the same objectives over a period of at least several years, and in good and bad markets.

    Simply going with a fund because itís name sounds like itís what you need is very risky. Sometimes the name of a fund isnít very accurate, a fund called ďGrowth and IncomeĒ may not provide much income at all. The prospectus will give you the important details about your investment; you should take the time to read and understand all that pertains to a fund before you commit your money to it.
  • Disclaimer

    Information in these articles is brought to you by Finance Globe. Banks, issuers, credit card, and other companies mentioned in the articles do not endorse or guarantee, and are not responsible for, the contents of the articles and is further subject to our terms and conditions.
  • Recent Headlines and Articles

    ChrisB

    What are your Retirement Goals? You Should Know the Answer

    Most people say they want to retire by a particular age, such as 62, and automatically assume that this is good enough. However, many realize after some time that they are not on track to do so.

    One of the best ways... read more
    ChrisB October 29th, 2014, 09:13 AM
    ChrisB

    3 Big Benefits of a Money Market Account

    Money market accounts are a popular choice among those who are looking to save money without taking any risk. From local financial institutions to online banks, opening one of these... read more
    ChrisB October 28th, 2014, 09:02 AM
    ChrisB

    3 529 Savings Plan Mistakes to Avoid

    With the cost of college on a rise, a growing number of parents are researching the pros and cons of a 529 savings plan. This allows you to save money for your childís college, all in an account that is not subject to federal income... read more
    ChrisB October 27th, 2014, 09:41 AM
    ChrisB

    Overlooked Benefits of Online Banking

    Many years ago, nobody would have given online banking a second thought. In todayís world, with so much advanced technology, this is something millions of people have fallen in love... read more
    ChrisB October 23rd, 2014, 09:20 AM
    ChrisB

    3 Alternatives to Traditional Retirement Saving

    When it comes to saving for retirement, you know one thing to be true: more is always better. While this may be the case, some people donít have enough time or earn enough money to reach their goals.
    ... read more
    ChrisB October 22nd, 2014, 09:27 AM
    ChrisB

    5 Ways to Save More for Retirement

    Is retirement age closing in on you in a hurry? Are you worried that you donít have enough money to hang up your work boots for good? If you find yourself in this position, you can take comfort in knowing that you are not alone.... read more
    ChrisB October 21st, 2014, 08:38 AM
    ChrisB

    The Cost of Upgrading your Companyís Technology

    As a small business owner, you likely understand the importance of technology. Some companies are ahead of the times, while others are lagging behind and looking for a way to catch up.

    If you feel that now... read more
    ChrisB October 20th, 2014, 09:53 AM
    ChrisB

    The Benefits of an Online Life Insurance Quote

    When the time comes to purchase life insurance, you have several options for starting the process.

    Some people know an insurance agent who can help them. For this reason, they contact the person... read more
    ChrisB October 16th, 2014, 10:32 AM
  • Recent Article Comments

    Wanderer

    What are your Retirement Goals? You Should Know the Answer

    As a retiree I can say finding ways to set aside money and survive life's many ups and downs is a... Go to last post

    Wanderer October 30th, 2014 03:37 AM
    Wanderer

    Overlooked Benefits of Online Banking

    Took me a long time to buy into online banking. The benefits of availability coupled with much... Go to last post

    Wanderer October 24th, 2014 03:05 AM

 

 

 

Credit Cards | Finance Social Network | Credit Card Reviews | Markets
About Us | FG on the Web | Sitemap | Privacy | Terms | Contact


Copyright © 2014 Finance Globe. All rights reserved.