Mutual funds are the most popular and perhaps the best choice for
individual investors. There are about $1.4 trillion invested in
stock funds out of a total of $3 trillion in all mutual funds.
Their popularity is not undeserved. The most significant
advantage of a mutual fund is expert management. A mutual fund is
managed by one or more managers, whose job is to generate the
highest return for your buck. They are professionals in the
business and are usually aided by a research staff. A mutual
fund is basically a pool of many investors' money. By investing
in a fund, you get diversification because you are getting a
share of a multimillion-dollar pool. For example, $1000 can't buy
you too many shares of different stocks. But by putting it into a
mutual fund, you are getting a slice of a pool that owns tens if
not hundreds of stocks.
The business section of your local paper should list the net
asset value(NAV), or how much a share of a fund is worth, of
thousands of mutual funds. Funds usually have minimum initial
investments, usually $1000, and minimum investment after that,
usually $50 or $100. After you have made a initial investment,
you can send money as often as you like as long as it's more than
the minimum. Or you can just let the initial investment sit and
Some funds, like the Fidelity
family of funds, the largest mutual fund family with more than
$100 billion under management, charge a "load" of several percent.
That means a commission of that percent is taken out of the
amount you sent them, the rest is then invested into the mutual
fund. There are more than 7000 funds out there and a majority of
them are "no-load". There are plenty of great funds in the "no-
load" category, so you should avoid buying a "load" mutual fund.
Of course, fund managers don't work for free, some fees are
charged. The biggest is the management fee, for the work of the
manager, the research team and brokerage expenses. There might
also be a 12b-1 fee, covering the fund's advertising and
promotional costs. All fees combined shouldn't be more than 2%.
So which fund or funds out of the 7000 plus should you pick? The
most important thing to look for when evaluating a fund is its
performance record. By this I don't mean just go buy the best-
performing funds of the moment. Instead, look for consistent
winners, ones that had few, if any, down years, ones that held up
well in bear markets, ones that had double digit gains
consistently. Historically, the hottest funds of one year usually
did poorly for the following years. Past performance record is
probably the best indicator for long-term performance.
Funds are divided into categories according to their objectives.
Income funds seek stocks that pay healthy dividends that usually
are not very risky. Growth and income funds look for stocks that
pay a dividend and have potential for growth. They provide fairly
low risk along with long-term growth. Growth funds look for
stocks that have high potential growth and usually offer little
or no dividends. They are more risky than the first two
categories but provide higher long-term growth. Aggressive growth
funds are usually the riskiest of all funds. They look for stocks
with the highest potential for growth and tend to fluctuate
widely. They generally perform better than other type of funds in
an up market, but perform poorly in a down market. Value funds
seek undervalued stocks that are selling for a lot less than what
the companies themselves are really worth. They can be risky because sometimes this kind of
stocks eventually go bankrupt or go down in value even further.
Funds can also be divided according to the type of assets they
buy. There are large, medium, small and international company
stock funds and bonds funds. Balanced funds invest for both
current income and long-term growth by buying both stocks and
bonds. There are sector funds that only invest in certain
industries, such as airlines, computers, electronics, gold
All the mutual funds discussed above are called "open-end" funds.
The amount of money in the fund varies as investors take out and deposit money
all the time. Another class is "closed-end" funds. They are just like
stocks and are traded on stock exchanges. When a closed-end fund starts
up, they issue a set amount of shares to the public. The number of shares
doesn't change. The price of a share of the closed-end fund could be trading
above or below the NAV(net asset value) of the fund. You can buy a share of the stock for
less than what that share is really worth. Purchase of closed-end funds are
not recommend just because they are trading below the NAV, because it
could be trading below the NAV in the future as well. If you want to buy
a closed-end fund, look at the performance record in terms of the fund's
NAV and in terms of its stock price.
Mutual funds are ideal for long-term goals such as retirement.
Depending on the urgency of your goals, you should choose the
type of funds according to their risks. The following is a
time horizon of the goal
less than 5 years
20%CD, money market funds
20% high quality corporate bond fund
50% small company fund
40% high quality corporate bond fund
40% growth-income fund
30% medium company fund
40% income fund
40% growth fund
20% international fund
Networth-The most comprehensive
mutual fund site on the web. Need to register to access the site. Contains
information on many mutual funds and information about investing in mutual funds. Mutual Fund Market Manager-Search for top performing
funds by timeframe, look up data provided by Morningstar on the funds.
The Fund Search feature allows you to search for funds by various criteria.
Mutual Funds Interactive-A guide to mutual fund resources on the Internet. It
also includes original articles on the mutual fund industry and profiles of the men and women
behind the funds.
Mutual Fund families
Fidelity-The largest mutual fund family. Funds including
Magellan, the largest mutual fund with $50 billion in assets.
Vanguard Investor Education-A family famous
for its index funds(funds that duplicate stock indexes such as the Stand & Poor's 500, Russel 2000, etc. Provdide
information on mutual fund investing and investing in general.