What is a Mutual Fund?
Suppose that you’re shopping in an investment “store” for a few ideas that will grant you a good return for your money. You see some relatively inexpensive options, but the ones that really interest you are more expensive. So you go home and call your friends to see if they would be interested in investing along with you. Then, all of you pool your money together to get a better item. This is the basis of a mutual fund, except you don’t know the other investors.
How They Work
When you give your money to a mutual fund, you are given shares in return. When the fund makes money, you get more shares (or money). When the fund loses money, you lose shares (or money). You, as well as your fellow investors are allowed voting rights, as you are each a “shareholder” of your fund.
There are, of course, a few items that deserve your attention prior to giving your hard earned cash to anyone; all to assist you in choosing your ideal mutual fund:
- What is your investment objective? Are you saving for retirement? Your child’s college education? Maybe a simple, rainy day fund? Your main financial objectives will grant you your heading, taking into consideration the amount of time you have, as well as cash to invest.
- Be sure that you understand the risks involved in a mutual fund, because no matter where the fund was sold to you, it’s not FDIC insured. This means that loss is a definite possibility.
- Decide whether you should attempt the investment on your own or go through a broker/dealer who can charge you a sales load.
- Read the fine print; including the fee table. Some funds will be less costly than others; all will affect your return.
One caveat for you to be on the lookout for while exploring the world of mutual funds: Hidden fees. These fees can add up to a staggering 3% a year! When you subtract this from the return made on your investment (if any), it may have been more beneficial to place your money into certificates of deposit or some other “guarantee”.
An Option for the Not-So Mutual Fund Savvy – Index Funds
The all-market Index fund and/or the S&P 500 index fund make for a sound investment with a great return, without the hassle of searching through scores and scores of mutual funds. The fees are also substantially lower.
If you have any questions, comments, or concerns regarding the broker/dealer/financial advisor of your potential mutual funds investment, contact your local Securities Division to ensure that they are registered to conduct business in your state. You can also check to see if they have any complaints against them on file.
