Investing Basics
Mutual Funds: Getting Started With Funds
TSC Staff
10/19/05 - 07:19 PM EDT
The three most important tenets of planning an investment portfolio are: diversification, diversification and diversification. But diversifying when buying stocks isn't cheap, making it tough for the individual investor.
As with most dilemmas in life, a product has been created to address the problem: the mutual fund.
A mutual fund holds a group of stocks, bonds or other investment vehicles and is managed by an advising company. In buying a mutual fund, you get to hold a broad range of stocks and/or bonds because your money is thrown in to a much larger pot of money from other investors. The upshot: For a modest sum, you get a professionally managed portfolio.
Of course, not all mutual funds are alike; in fact, some mutual funds with very narrowly focused investment strategies wouldn't meet most people's standard of diversification. So, you the investor must understand the many ways in which mutual funds vary to determine which one fits your investment goals.
First off, funds have different investment objectives, and carry different risk levels. In the shallow end of the risk pool are mutual funds that invest in currency or safe government-backed Treasurys that offer unspectacular but steady returns. In the deep end, there are mutual funds that put all their cash into one volatile sector of the market, such as Internet stocks. In between, thousands of mutual funds offer varying investment objectives, focuses and risk levels.
Another important matter when considering which mutual fund to buy: How much are you paying the adviser to manage your money? First, there is the question: Does the mutual fund have a load, or sales charge, or is it a no-load offering? Beyond management fees, there may be distribution fees and redemption fees, not to mention expenses associated with stock trades made by the mutual funds (We'll get more into the particulars of each type of fee below). Mutual-fund companies detail their funds' costs in the prospectus, and fees are a major consideration.
Now that you know what a mutual fund is, it's time for some lessons.