What You Should Know About Mutual Funds
What exactly is a mutual fund?
A mutual fund is a pool of money from many investors to build a portfolio of stocks, bonds, real estate or other securities, according to its charter. Each investor in the fund gets a share of the total profits of the investments.
Mutual funds make it easy to diversify investments.
They require moderate minimum investments, from a few hundred to a few thousand dollars. This allows investors to have a diversified portfolio more cheaply than they could on their own.
There are different kinds of stock funds.
Growth funds buy shares of burgeoning companies; sector funds buy shares of companies in a particular sector, like technology or health care and index funds buy shares of every stock in a particular index, like the S&P 500.
There are also safe investments, like government bond funds; high-risk investments, like high-yield bond funds; and low-tax investments, like municipal bond funds.
You have to think about risks.
When you buy into a fund, think about how risky its investments are. Can you take big market swings to get higher returns? If not, stick with low-risk funds. Check three factors: the fund's biggest quarterly loss; its beta, which measures a fund's volatility against the S&P 500; and the standard deviation, which shows how much a fund bounces around its average returns.
Look at the expenses.
Funds charge a percentage of total assets. They may not sound big, but they create a serious drag on performance over time.
Consider taxes as well.
Think about how much of your fund is going to pay taxes. You may be surprised to learn they owe taxes – both for dividends and for capital gains – even for funds that have declined in value. Tax-efficient funds avoid rapid trading (and high short-term capital gains taxes) and match winning trades with losing trades.
Never go after winners.
Look at consistency of performance over longer periods of time.
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I prefer mutual funds because they allow me to diversify my investments without having to go through the trouble of building my own portfolio.
Personally, I have been happy with index funds. The very low expense ratios can make a big difference in total return. Besides, there can often be great variability in the performance of actively managed funds.
Student Finance
What about no-load funds – those that have no fees? Do they have a downside?
Amazing read. Thank you for sharing finance advice.
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