What is Mutual Fund?
How do Mutual Funds Work?
When you invest in a mutual fund, your dollars are pooled with other investors’ dollars. The fund’s management team uses that money to build and manage a portfolio of securities. Each fund has an investment objective or strategy that dictates, in general, what types of securities are bought for the fund’s portfolio. Your investment buys shares of that portfolio at a share price that is updated daily. Each fund’s objective is detailed in its prospectus, which also details a fund’s major features, portfolio strategy, risks and expenses. You should always read a fund’s prospectus before investing or sending any money.
How do I make Money from my Mutual Fund Investment?
When you invest in a mutual fund, you can earn money in three ways: Capital Appreciation – the share price of your fund rises as the securities in its portfolio increase in market value. Capital Gains – Your fund sells securities for a profit, which is paid to you in a capital gains dividend. Dividend Income – The securities in your fund’s portfolio earn interest or pay you dividends.
Why invest in a mutual fund?
Professional Money Management
It takes time, experience and vast resources to capitalize on the financial market’s opportunities. When you invest in a mutual fund, expert portfolio managers study the markets to make informed decisions on your behalf.
Mutual funds invest your assets in a large number of securities, making you less dependent upon the success of any one security.
Variety of investment choices
Within a mutual fund family you can choose among diversified or focused funds investing for growth, income or a combination of both.
Mutual fund investing is an affordable way to invest in a diversified portfolio. In fact, you can start your mutual fund investment program with monthly investments of as little as $100.
You can sell your shares at their current net asset value any time because mutual fund companies are required to “buy back” your shares at your request.
Time Tested Strategies for Mutual Fund Investors
Pay yourself first
Invest a fixed amount monthly, or transfer the amount automatically from your checking account into your investment account. This strategy is known as dollar – cost averaging. You’ll buy fewer shares when stock prices are high, and more shares when they’re low. And, over time, this strategy may lower your average cost per share (see chart below).
Diversify to help reduce Risk
Diversifying your investments among different types of stock and bond funds makes you less vulnerable to a major decline in any segment of the market.
Reinvest Your Dividends
Put the income from your investments “back to work” – immediately and automatically. This can compound your investments’ growth over time.
Keep a Long – Term perspective
Remember that financial markets rise and fall in response to a number of factors over the short term. The longer you ride out market fluctuations, the greater your opportunity to reduce risk and achieve higher returns.