What is a Mutual Fund ? – 15 Basics to Know

1. What is a mutual fund?

A mutual fund combines money from several investors to invest in different types of investments or investment companies. The investments could be stocks, bonds, money market instruments’ or other types of investments. Each investor in the mutual fund hold a proportion of the investment in the way of shares. There are low-risk, mid-risk and high risk mutual fund companies, as well as low earning and high earning companies. One mutual fund company is typically very diversified and can invest in as many as 400 companies or as few as 40 companies. Diversity is what takes much of the risk out of mutual funds.

2. How do I purchase a mutual fund?

Stocks are purchased from stock exchanges, such as the New York Stock Exchange, usually through a brokerage office or online broker. Mutual fund shares are purchased from the mutual fund company itself or from a broker.

3. Who oversees the mutual funds I invest in?

Registered and licensed Investment Advisors, in a team or individually, manage investment portfolios of mutual funds.  Investors have an advantage, by using the expertise and experience of the advisors. You can go to sec.gov or finra.org to verify that your advisor is a registered investment advisor.

 4. What general types of mutual funds are there?

There are many types of mutual funds. They are categorized by many different categories. High risk versus low risk, highly-diversified versus low- diversity, sector funds (invest in a single industry) versus diversified funds (invest in many industries). No-load versus load funds (you have to pay to purchase or sell a fund that has a load, but you don’t have to pay to purchase or sell with no-load). All mutual funds charge yearly fees, there are high fee mutual funds and low few much funds. The lower your fees, the more your money goes to work for you.

 5. What types of mutual funds are there by company types?

There are mutual funds made up of many company types for instance: Mutual funds made up of large company stocks, small companies, growth companies, value companies , bond companies, single sector companies, money market funds, and index funds.
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6.  How much does a mutual fund cost?

Mutual fund investors pay a NAV for each share they purchase in a fund, the NAV is also known as the Net Asset Value of the mutual fund. The NAV is the price paid for each share plus the cost of fund which is made up of fees or loads.

 7.  What are mutual funds used for?

Investing in mutual funds can be used for many different resources. Among them are general long term savings, retirement savings, and college savings planning.

8.  How do I redeem a mutual fund to use the money?

Mutual fund shares are “redeemable,” meaning investors can sell their shares back to the fund (or to a broker acting for the fund), and the money can be sent to you in a check, placed on your debit card, or put in a money market account in your brokerage or online account.

9.  Are mutual funds guaranteed?

Mutual funds are not guaranteed or insured by the FDIC — even if you buy through a bank and the fund carries the bank’s name. You can lose money investing in mutual funds as any other investment.

10. Are my mutual fund investments guaranteed at all?

You have insurance by the SIPC, which covers fraud. In other words, if you invest your money in company “C”, a registered investment company, and it is stolen by the President of  Company “C”, you will be covered for up to $500,000.

11. What are the advantages of investing in a mutual fund?

With a mutual fund you will get professional management, diversification, an affordable investment, and it is liquid. This is one of the main items that encourge investors to invest in mutual funds after asking the question, what is a mutual fund?

12.  What are the disadvantages of investing in a mutual fund?

You still have costs even when returns are negative, You don’t control the investments, You don’t know for sure if the price will go up after you purchase – but there is research you can do to verify that you are getting a quality mutual fund.

13.  You can earn money from your mutual fund in three ways

Dividend Payments — A fund may earn income in the form of dividends and interest on the securities in its portfolio. The fund then pays its shareholders nearly all of the income (minus disclosed expenses) it has earned in the form of dividends.

Capital Gains Distributions — The price of the securities a fund owns may increase. When a fund sells a security that has increased in price, the fund has a capital gain. At the end of the year, most funds distribute these capital gains (minus any capital losses) to investors. Most mutual funds pay money into your mutual fund account yearly, a few pay on a quarterly basis. This means if you pull your money from your mutual fund that pays out capital gains and dividends yearly, you will loose your profits.  So, be patient.

14. What is the NAV of my mutual fund

Increased NAV — If the market value of a fund’s portfolio increases after deduction of expenses and liabilities, then the value (NAV) of the fund and its shares increases. The higher NAV reflects the higher value of your investment. The more the NAV increases, the more money your investment will be worth.

15. How can I save money to invest in a mutual fund?

Most Important Learn to Save Money For Your Mutual Funds Investments With This Budget Planner

These are the answers to your question, what is a mutual fund ?  You can do extensive research on mutual funds in any of the major online brokerage or mutual fund companies. When you research mutual funds at any of the online brokrage firms. Go to the research tab, then onto the mutual fund tab. Some companies have apps that will allow you to find the mutual funds with the lowest risk and lowest cost. Keep in mind that you will have to put a lump sum in a mutual fund to start it. Most mutual funds require $2500 to start, but you can put in much less to maintain it. With the budget planner you can save money to start an important mutual fund;  for long term savings, retirement, college funding or taking care of a loved one.

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author & artist
Lois Center-Shabazz

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