Best Mutual Funds, Mutual Funds Basics, Sector Funds, ETF's, Exchange traded funds, Top Mutual Funds, stock market, stocks, bonds   Best Mutual Funds, Mutual Funds Basics, Sector Funds, ETF's, Exchange traded funds, Top Mutual Funds, stock market, stocks, bonds 
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Mutual Funds Basics

Home > Mutual Funds > Mutual Funds Basics

Best Mutual Funds, Mutual Funds Basics, Sector Funds, ETF's, Exchange traded funds, Top Mutual Funds, stock market, stocks, bonds
Visit any big mutual fund company's web site (like www.Fidelity.com) and they'll tell you that a mutual fund is a pool of money from many investors that is used to pursue a specific objective. They'll also hasten to point out that the pool of money is managed by experts and investment professionals. A fund prospectus should tell you that a mutual fund is a management investment company. But in a nutshell, a mutual fund is a way for the little person to invest in almost anything. The most common varieties of mutual funds invest in stocks or bonds.

First let's look at the important question -- how little is our proverbial little person? Well, if you have $20 to save, you would probably speak to your neighborhood bank about a savings account. Most mutual funds need an initial investment of at least $1,000. Exceptions to this rule usually require regular, monthly investments or buying the funds with IRA money.

Next, let's clarify the matter of the prospectus, since that's probably the first thing you'll receive if you call a fund company asking for information. A prospectus is a legal document required by the SEC that explains exactly what you're getting by sending money to a management investment company, also called buying into a mutual fund. The information most useful to you immediately will be the list of fees, i.e., exactly what you will be charged for letting your money be managed by that mutual fund. The prospectus also explains things like the strategy taken by that fund, risks that are associated with that strategy, etc. Looking at one, you'll quickly see that securities lawyers don't write essays that are any more comprehensible than other lawyers.

The value of an investment with an open-ended mutual fund is quoted in terms of net asset value (NAV). Basically, this is the investment company's best assessment of the value of a share in their fund, and that is what you see listed in the paper. They use the daily closing price of all securities held by the fund, subtract some amount for liabilities and divide the result by the number of outstanding shares and you have the NAV. The fund company will sell you shares at that price (don't forget any sales charge) or will buy back your shares at that price (possibly less some fee).

Although boring, you really must understand the basics of fund structure before you buy into them, mostly because you're going to be charged several fees depending on that structure. All funds are either closed-end or open-end funds. The open-end funds may be further classified into load funds and no-load funds. Confusingly, an open-end fund may be described as "closed to new investors" but don't mistake that for closed-end.

A closed-end fund looks very much like a stock of a publicly traded company - it's traded on a stock exchange, you buy or sell shares in the fund through a broker just like a stock (including paying a commission), the price fluctuates in response to the fund's performance and (very important) what people are willing to pay for it. Also like a publicly traded company, only a fixed number of shares are available.

An open-end fund is the most common type of mutual fund. Both new and existing investors may add any amount of money they want to the fund. Said another way, there is no limit to the number of shares in the fund. Investors buy and sell shares generally by dealing directly with the fund company and not with an exchange. The price moves in response to the value of the investments made by the fund.

Now, an open-end fund may be a load fund or no-load fund. An open-end fund that charges a fee to purchase shares in the fund is called a load fund. The fee is called a sales load - hence the name. The sales load could be as low as 1% of the amount you're investing, or as high as 9%. An open-end fund that has no fee for purchase of shares in the fund is called a no-load fund.

Which one is better? The debate of load versus no-load has taken ridiculous amounts of paper (not to mention bandwidth), and we don't know the answer either. Look, the fund is anyway going to charge you something to manage your money. So you must consider the sales load in the context of all fees charged by a fund over the long run - then make up your own mind. Usually you will want to minimize your total expenses, because expenses will diminish any returns that the fund achieves.

One wrinkle you may see is a "closed" open-end fund. An open-end fund (may be a load or a no-load fund) may be "closed" when the investment company decided at some point in time to accept no new investors to that fund. However, all investors who owned shares prior to that point in time are allowed to add to their investments. Simply put, if you were in before, you can get in deeper, but if you missed the cutoff date, it's too late.

While looking at various funds, you may find a statistic labeled the "turnover ratio." This is simply the percentage of the portfolio that is sold out completely and issues of new securities bought versus what is still held. In other words, it is the level of trading activity initiated by the fund manager. This could affect the capital gains and the actual expenses incurred by the fund.


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