Mutual funds offer a happy medium to investors who feel uneasy about the high volatility and risk inherent in stocks yet want to earn more interest than what a traditional savings account offers. This is what a very good of friend of mine - who also happens to be an accomplished mutual fund manager – says. I couldn't agree more. Mutual funds provide you with various benefits, but like any other investment product, they also carry risks. To reap the maximum benefits from your mutual fund investments, talk to the right people and do your homework by reading the prospectuses and other documentation sent by the mutual fund you are interested in.
What Are Mutual Funds?
Mutual funds are exactly what the adjective implies: "mutual" money. In other words, an investment manager takes money from several investors and uses that vast pool of cash to invest in a pastiche of investment products, in accordance with the fund's asset allocation objective. "Asset allocation" is financial shortcut from "investment." Investment products in which a fund manager puts money run the whole gamut, from stocks and bonds to exchange-traded funds to U.S. Treasury bonds and notes to real estate investment trusts to money market funds.
How Do They Work?
The prospectus of the mutual fund you choose would better answer this question, but here is what happens in a nutshell. Suppose a mutual fund manager wants to raise $1 billion to start a new technology fund. The manager sets the initial share price at $1,000. (The share price is often called net asset value, or NAV.) You invest $10 million in the fund, which means you own 10,000 shares. The manager successfully raises money from other investors and starts investing in everything from chip makers and computer manufacturers to software makers and IT consulting businesses.
The total value of the fund fluctuates every day because the components – meaning, the shares of the investee companies – also change. At the end of each day, your account will reflect a specific numerical change, depending on your ownership percentage. Let's say that after one year, the fund's worth grows to $1.2 billion - which means that the value per share equals $1,200, or $1.2 billion divided by 10,000. Accordingly, your account's value would be $12 million, or $1,200 multiplied by 10,000.
How Do I Invest in Mutual Funds?
Contact your banker to learn more about ways you can invest in mutual funds. He or she would explain to you the process for fund investment, eligibility criteria, minimum investment amount and managers' fees. The last part is important because professional managers typically run mutual funds and select the myriad of investment products that make up the funds. My fund manager friend says it is important to enquire about a mutual fund's objective to make sure it fits within your own asset-allocation objectives and risk profile – meaning, whether you are a risk taker or risk averse.
Besides banks, you also can reach out directly to mutual fund companies, and they will give you more information about the account opening process along with funding and withdrawal requirements.
Can I Easily Track My Money?
Yes. You typically open an account at your bank, mutual fund company or brokerage business before investing in a mutual fund. You wire money to the account and select the specific funds you want, which is an easy process because all mutual funds, similar to stocks and bonds, have a unique identifier called "ticker symbol." Once the account is opened and funded, you can track changes in the fund's worth on a daily basis, typically after 4:00 p.m., which is the closing time for the New York Stock Exchange. Contact your bank, brokerage or fund company for more information about account value tracking. Besides daily monitoring, you also can delve into your account a bit deeper when you receive your monthly or quarterly statement, either via regular mail or online.
What Types of Mutual Funds Are Out There?
You can buy mutual funds as diverse as open-end, close-end and unit investment trust.
Open-end mutual fund - You can sell your shares back to the mutual fund company at the end of each business day. This is a convenient if you no longer want to invest in the fund or need money for something else. You redeem your investment, and the company sends you a check or wire-transfers you the value of your shares on that specific day.
Closed-end mutual fund – If you want to sell your shares, you have to find a buyer on a financial market, such as the New York Stock Exchange or the London Stock Exchange. This should not be a problem if the mutual fund is a major player and the shares are liquid, meaning many investors buy and sell them every day.
Unit investment trust – You can sell your shares back to the trust company, similar to an open-end mutual fund, or wait for the termination period typically indicated in the UITs' incorporation document. This type of investment has a limited lifespan, say, 5 or 10 years.
By investing in a mutual fund, you put your money into a collective cash pool that a professional manager oversees, selecting investment products that fit the fund's objectives and maximizes income for shareholders. To reap the benefits of mutual funds, select the proper fund, talk to your banker before investing and periodically track your portfolio's value, among other initiatives.