---------------------------------------------------------------------------------
Don't Ignore These Mutual Fund Basics
View PDF | Print View
by: JaneCalhoun
Total views: 64
Word Count: 810
Even after we've suffered a downturn in the market, mutual funds are still popular investments. They offer a way to diversify, are professionally managed, and are easy to buy and sell. In the recent past, mutual funds have been thought of as nearly a no-lose investment, but now that we know that's not always the case, learning about mutual funds basics can help avoid these kinds of losses in the future.
With more than 10,000 different funds available on the market, it can be tough to determine which are the right buys for you. It is possible to choose a top mutual fund which fits your overall strategy, and knowing the basics is part of knowing which ones are right for you.
Until late 2008 and into 2009, mutual funds enjoyed quite a reputation for steady returns and safety. They also gave investors an easy way to diversify their holdings. Funds also help spread the market risk among various investments. even in times of economic downturn, these qualities are worth finding in a good mutual fund.
As a mutual fund is set up, the fund raises investment cash from investors, then uses that money to invest in stocks, bonds, and other securities that are a proper fit for the objective of the fund. Within the fund there is nearly always than a single individual investment. When the value of those investments goes up, or goes down for that matter, its investors also see a gain or a loss. When a fund pays out a dividend to shareholders, the investors get their fair share too. In addition, you can find that funds are well managed by professional advisors.
The fund managers will continue to sell shares, raising capital and then purchasing stocks, bonds or other investments for fund portfolio. The management team is obligated to follow the stated investment objective of the fund in the purchases it makes. the proceeds of any shares bought by investors provides the cash to invest. At some point, a fund when it grows large enough, may close to any new investors, at which point it is called a "closed end" fund.
When the shareholder invest by buying shares, they receive an equity share positions in the mutual fund. At this point the shareholders each own a piece of the underlying securities owned by the fund. For the most part, mutual fund shareholders are permitted to sell their fund shares on the market at any time, but the price they get will be determined by the daily changes in the share price as it is reflected in the performance of the underlying investments.
Some investors decide which mutual fund to choose based only on the performance of the fund or fund family within the past year or so. Some get their ideas from tips from a friend, co-worker or family member. Or, some buyers could be influenced by something they read in a magazine or on the Web. While these methods might result in buying a good fund, they are far from a sure thing. Actually, this is also a risky way to choose an investment, of any kind. Without any analysis of the fund's characteristics, it's hard to know if the fund is a good buy for that particular investor.
Note that every mutual fund has individual characteristics that are unique to it, such things as the performance, the personalities of the management, what the fund's investment objectives are and so on. When choosing a mutual fund, it's better to also consider your own financial plan overall, to see if the fund fits your own objectives. Start by defining your personal financial goals first, and address your financial priorities, the amount of money you have available, and the level of risk you are comfortable with. Put down also in your plan the time line you expect your strategy to bear fruit.
It's always fun to talk about the high-flying funds and their performance returns, or then again, since the crash of 2008-2009, it's not as exciting as it once was. Nevertheless, it is a good lesson to understand that a fund's total return for the previous several months or years simply isn't a very good method for rating mutual fund performance. Whatever high returns a fund may have earned in the past, it only takes one down year for performance ratings to drop dramatically. Remember the old saying, past performance is no guarantee of future returns. Instead, determine which is the right fund for you by looking at other funds in the same category of investment, such as bond funds, growth funds, equity income funds, etc.
You should analyze the track record of a fund beyond just the recent several months, to see the fund's management syle and performance over time. By keeping these mutual fund basics in mind when you look for investments, you'll begin to create a sound investment foundation.
About the Author
Looking for the best way to invest money in a bad economy? Jane Calhoun writes about how to invest in mutual funds in today's investment climate.
Rating: Not yet rated