Saturday, February 9, 2013

Understanding Mutual Funds

Mutual Fund is a type of investment fund. An Investment Fund is a collection of investments such as stocks etc. Mutual Funds can be an economical and convenient way to invest in the stock market. Pooling your money with other investors enables you to purchase shares of stock from companies you might not be able to purchase on your own, offering diversification and professional management of your money. Unlike most other types of investment funds, mutual funds are "open-ended" which means as more people invest, the fund issues new units or shares.There are different mutual funds for different investment objectives, so how do you know which mutual funds are right for you?

1.Identify your Investment Objectives. What do you want to do with your money? Are you planning for retirement, or maybe college education for your children? Do you want tax free income? Recognizing what your investment objectives are is the first step in understanding what type of mutual fund is appropriate for you.

2.Identify your Investment Time Horizon. How long can you invest your money in a mutual fund before you will need it? If you are many years from retirement, you may want to take advantage of the long time horizon and consider a mutual fund that invests its assets in an aggressive mix of stocks that have capital appreciation as a goal. If, on the other hand, you are close to retirement, a shorter time horizon may dictate a mutual fund that is geared toward a mix of conservative stocks and bonds that will provide an income stream to supplement your retirement income.

3.Identify your Risk Tolerance. Are you a conservative investor who gets nervous about the up and down swings of the stock market? If so, then maybe a mutual fund that invests in high quality bonds that won't fluctuate in relation to the stock market might be a good fit for you. Or maybe you have a higher risk tolerance, in which case a mutual fund that invests in a portfolio of technology stocks may suit you. Identifying how much risk you are willing to accept is an important consideration when deciding on your investment objectives.

4.Understand the Objectives associated with the Mutual Fund. What are the objectives of the mutual fund? Some mutual funds concentrate on growth and pay little in the way of dividends (interest on your money). Other mutual funds forego growth to concentrate on maximizing dividends. Still others will generate tax free income.

5.Understand the fees associated with managing the mutual fund to determine if they are reasonable in relation to similar types of funds. Mutual fund fees that are higher than the industry average can have an impact on your rate of return.

6.Understand how the Mutual Fund is Managed. Some mutual funds are managed by only one fund manager and others by multiple fund managers. In either case, some questions you may want to know about the fund managers are: How well have they earned money for their shareholders? A mutual funds performance is a reflection of how well the fund manager's investment decisions have made money for the shareholders of the fund. How long have they been managing the assets of the mutual fund? A fund manager that has been managing the fund for a short period of time won't have a track record of performance over different market conditions and economic cycles. How often do they buy and sell shares of stocks or bonds for the fund? Frequently buying and selling shares of the underlying stocks and bonds can generate increased transaction costs and contribute to higher mutual fund fees.

7.Read and Understand the Prospectus and Annual Report before investing in a Mutual Fund. The prospectus is a detailed booklet which describes the mutual funds investment objectives and lists the management fees and costs associated with investing in the fund. Details such as investment results, average annual rate of return, total fund operating expenses, minimum initial investment required to purchase the fund and minimum subsequent investments are some of the topics covered in the prospectus. The annual report contains a letter to the shareholders from the chairman and president of the fund and explains how the fund performed during the prior year and how they expect the fund to perform in the upcoming year. It also profiles the fund manager's investment philosophy and offers their perspective on the fund. Each stock or bond is listed as a percentage of the fund's total investment and is found in the annual report.

 Following these steps can help you make a better informed decision in your understanding of mutual funds while helping you achieve your financial goals.

By WikiHow