Over the last decade mutual funds have become extremely popular with millions of people moving moeny from low-return bank accounts to potentially higher-return investments thru mutual funds.
Here’s why everyone’s doing it and why it could be the way for you to invest your cash:
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WHAT ARE MUTUAL FUNDS:
A mutual fund is a collection of stocks and/or bonds. A mutual fund is like a company that brings together a group of people and invests their money in stocks, bonds, and other securities. Each investor owns shares, which represent a portion of the holdings of the fund. You can make money from a mutual fund in three ways:
1. Income earned from dividends on stocks and interest on bonds. A fund pays out nearly all of the income it receives over the year to fund owners in the form of a distribution.
2. If the fund sells securities that have increased in price, the fund has a gain. Most funds also pass on these gains to investors in a distribution.
3. If fund holdings increase in price but are not sold by the fund manager, the fund’s shares increase in price. You can then sell your mutual fund shares for a profit.
WHY MUTUAL FUNDS:
1. Professional Management – The biggest advantage of mutual funds is professional management of your money. Investors purchase funds because they do not have the time or the expertise to manage their own portfolios. A mutual fund is a relatively inexpensive way for a small investor to get a full-time manager to do this. 2. Diversification – By owning shares in a mutual fund instead of owning individual stocks or bonds, your risk is spread out. The idea behind diversification is to invest in a large number of assets so that a loss in any particular investment is minimized by gains in others.
3. Economies of Scale – Because a mutual fund buys and sells large amounts of securities at a time, its transaction costs are lower than what an individual would pay for securities transactions.
4. Liquidity – Just like an individual stock, a mutual fund allows you to request that your shares be converted into cash at any time.
5. Simplicity – Buying a mutual fund is easy! Most banks and other financial companies offer a line of mutual funds, and the minimum investment is small.
NAV:
Net asset value (NAV), which is a fund’s assets minus liabilities, is the value of a mutual fund. You can think of NAV per share as the price of a mutual fund. It fluctuates everyday as fund holdings and shares outstanding change.
When you buy shares, you pay the current NAV per share plus any sales front-end load. When you sell your shares, the fund will pay you NAV less any back-end load.
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sksharma
Add Comments:how about telling us which ones to invest in also???