What is a mutual fund?
Mutual funds were invented over 100 years ago to serve the needs of small investors and they are still popular today. A mutual fund is like a basket of usually 50, 100, 200 or even 500 stocks or bonds. It is an investment that allows you to buy a broad mix of investments so that all of your money is not concentrated in 1 investment. The funds will usually hold stocks or bonds in various concentrations usually from 1% to 5% in each company. Mutual funds come in an almost infinite variety of choices. See below for just some of the fund types:
| Large Company Value | Large Company Blend | Large Company Growth |
| Mid Cap Value | Mid Cap Blend | Mid Cap Growth |
| Small Cap Value | Small Cap Blend | Small Cap Growth |
| International Large Value | International Large Blend | International Large Growth |
| Emerging Markets | International Small Cap | International Mid Cap |
| Sector Funds (like food or aerospace funds) | Bond Funds (treasury, corporate or municipal) | International Bond Funds |
| High Yield Funds (Junk Bonds) | Growth & Income Funds (a blend of stocks and bonds) | Target Date Funds |
Besides diversification, mutual funds have some other advantages including:
Professional Management – Mutual funds are managed according to a specified plan in the prospectus (the legal document governing the fund). Usually, the team has specific expertise in the particular area that the fund invests and that team may not be available to you any other way except through the fund.
Low minimum investment – Some funds have minimums as low as $50 so that even small investors can participate in the fund.
Liquidity – With few exceptions, the majority of mutual funds can be sold and converted to cash in 1 business day. This means that if you have an emergency, you can get to your money very quickly. If you had your money invested in your private business and needed to pull out money, you would have to find a buyer for a piece of your business and they may not be willing to offer a fair price on short notice.
There are 3 ways you can make money from a mutual fund:
1) Dividends: Mutual funds distribute any income received from dividends and interest to shareholders AFTER management expenses. For example, if a fund earned 2% in dividends but their management fee was 1%, you could expect to receive a dividend of 1%.
2) Capital Gains: If the fund bought some investment at a low price and then sold them later at a higher price, then the fund has capital gains. If you owned the fund when the fund sold the investments, you will likely receive a capital gain distribution.
3) If fund holdings increase in price but are not sold by the fund manager, the fund’s shares increase in price. If you bought the fund at $10 per share and it rose in price to $13, you could then sell your shares for a profit of $3 per share.
For more information click here for an informative video from Investopedia http://www.investopedia.com/video/play/openend-fund/?ad=dirN&qo=investopediaSiteSearch&qsrc=0&o=40186
This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.
David.Cross@us-am.com
