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Mutual Funds

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 grow.

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 mining, etc.

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 possible strategy:


	time horizon of the goal
less than 5 years	5-10 years	11+ 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

Online Resources

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 Fund Magazine-A respected magazine that focuses on mutual funds.

Closed End Fund Info

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.

FundLink-Links to all mutual funds on the web.