Jun 6, 2008

Mutual Fund FAQ

What is a Mutual Fund?
A mutual fund is simply a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. The mutual fund will have a fund manager who is responsible for investing the pooled money into specific securities (usually stocks or bonds). When you invest in a mutual fund, you are buying shares (or portions) of the mutual fund and become a shareholder of the fund.
Mutual funds are one of the best investments ever created because they are very cost efficient and very easy to invest in (you don’t have to figure out which stocks or bonds to buy).

What Are the Advantages to Using Mutual Funds?
Get Focused: I will admit that investing in individual stocks can be fun because each company has a unique story. However, it is important for people to focus on making money. Investing isn’t a game. Your financial future depends on where you put you hard earned dollars and it shouldn’t be taken lightly.
Diversification: There is no greater advantage to using mutual funds than diversification. Do you honestly believe wealthy investors purchase just a couple of stocks? Of course not! If they are not using mutual funds (many do), than they are purchasing a large number of stocks. Smart investors diversify because it greatly reduces risk without sacrificing returns.
Risk: In general, mutual funds carry much lower risk than stocks. This is primarily due to diversification (as mentioned above). Certain mutual funds can be riskier than individual stocks, but you have to go out of your way to find them.

What is Net Asset Value?
The Net Asset Value, or NAV, is simply a measure of the current dollar value of one share of a mutual fund. It’s the fund’s assets minus its liabilities divided by the number of outstanding shares.
NAVs are calculated at the end of each trading day. If the NAV increases, then it means the value of your holdings increase (if you are a shareholder).

Where is the Best Place to Buy a Mutual Fund?
Want to buy a mutual fund? There are many companies ready to sell you mutual funds, but due to a wide variety of fee structures, some companies are better suited to sell you mutual funds than others. Discover where you should buy your mutual funds.

When Should I Sell My Mutual Fund?
The media has no trouble telling you what funds to buy and when, but finding advice on when to cut a fund loose is much harder to come by.
Sometimes parting with a mutual fund can be a difficult task. Other times it can be quite easy. More often than not, investors tend to sell their mutual fund holdings for the wrong reasons. So before you make a hasty decision, please read the following list of the correct reasons to sell a mutual fund investment:
You Need the Money, Your Situation Has Changed, The Fund Has Changed Its Style or Objective, The Fund is Underperforming, The Fund Size Has Changed, The Fund’s Expense Ratio Rises or The Fund Manager Has Changed

What is a Closed-End Fund?
When people talk about “mutual funds,” they generally mean open-ended mutual funds. Closed-end funds are a different beast and really are more similar to stocks.

Should I Use the Funds in my 401(k)?
Funds are great for your 401(k). However, not all 401(k)s carry great funds and not all funds are right for you.

What is a Mutual Fund Load?
The short answer is: something you should avoid. No-load fund investing is popular among knowledgable investors for a reason.

Why Am I Paying Taxes?
Funds are required to pay capital gains each year, which means fund investors are often confused as to why a fund with a negative return for the year could possibly pay out distributions which end up being a taxable event for the fund investor.

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