Mutual Funds Explained

A mutual fund is a collection of stocks and bonds that are combined into a pool, which are purchased and sold.  By pooling these investments you are risk managing the losses that some stocks or bonds may have with gains made by others. This is basically protecting you from having all your eggs in one basket, which is a high risk strategy.

Mutual fund managers have the responsibility to manage a mutual fund.  When you invest into these funds you are buying a part of the stocks and or bonds that an investment has been made in.  Due to the size of these funds, your investment will only form a small percentage of the overall size of the investment.  The decision on what stocks or bonds that the mutual fund buys and sells is determined by the manager. These managers charge a commission and sales fees which you will have to pay for.  The structure of these mutual funds often falls within four categories. When you pay a fee at the beginning, this is called a front up. A back end is when you pay when the shares or bonds are sold. When there is a payment of a fee on a regular cycle, like the annual fee, it is usually based on a fixed percentage of the fund’s net assets.  The final type of fee is the best one of all, it is the payment of no fee at all and is commonly called the no load. Obviously this is a good one to shop around for and to select if the fund also has a good track record of providing good returns. There is a choice of the types of funds to invest in.

There are the standard stock funds that are issued by companies. The bonds funds are just that, the purchasing of issued bonds. Sector funds are target at specific parts of the economy, such as financial, industrials, mining and the like. International and global funds are as the name indicates, investments made outside of the United States.  Balanced funds enable the selection of stocks and bonds, which is a more risk adverse approach. Index funds are aligned to stocks of a particular type of stock indexes.

You probably heard of these reported quite regularly as the Dow Jones Industrial average, or another common one is the Standards and Poor’s 500. These are a collection of stocks that make up these stock indexes. Your investment in index funds is only with the stocks that are included in these fund indexes.