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One of the ways that investors can become acquainted with stocks is by investing in mutual funds. When shares of a mutual fund are purchased, the novice investor can quickly participate in a portfolio of common stocks that have been assembled by knowledgeable professionals.
Mutual Fund Managers
The role of the fund manager, or team of managers, is to follow each stock and / or bond in the portfolio. The manager then makes a decision whether to sell or purchase additional shares or securities. In an actively managed mutual fund, the management team looks for stock price patterns. The team then tries to take advantage of unusual patterns, or inefficiencies, in the market. In doing so, the fund managers increase the value of the mutual fund's shares. In a passively managed mutual fund, the team will trade less frequently.
This is important to understand because many actively-managed funds will have relatively high management fees. Even though you are only investing in a mutual fund, the team is buying shares of stock. The more they trade securities, the higher the level of brokerage fees required to handle these transactions.
If you look in the newspaper or online, you can find the mutual fund's price, usually quoted as the Net Asset Value or NAV. Unlike stock prices that fluctuate during the day's trading hours, a mutual fund's NAV is calculated shortly after the close of the stock exchanges; usually some time after 4:00 p.m. EST.
Investing in Funds
Investing in a mutual fund is fairly easy since you can start out with a relatively small investment, anywhere from $100 to $2,500. It's even possible to invest in a mutual fund over time through payroll deductions, or through electronic withdrawals from a banking account. Once you've made the initial investment in a mutual fund, many funds allow you to purchase additional shares with as little as $250 to $500.
The only item needed to open an account, besides the start up money, is a completed application. The information contained on the application will be used to establish an account with a brokerage or investment company. There are many large companies providing services to this market, including Fidelity Investments, Scottrade, Ameritrade, E*Trade, and TD Waterhouse.
Mutual Fund Research
We've written several articles aimed at helping individuals to better understand how to conduct mutual fund research. Those publications include:
- Buying Mutual Funds - a four part series that walks you through the process of evaluating and picking mutual funds.
- Mutual Fund Ratings - provides a detailed explanation of what to expect when looking at mutual fund ratings.
- Mutual Fund Loads - helps investors to understand the types of fees mutual funds will charge, and how those loads can eat into the investor's return on investment.
- Exchange Traded Funds - explains the difference between a mutual fund and what is called an exchange traded fund or ETF.
- No Load Mutual Fund - a second article aimed at explaining how mutual fund loads can hurt the investor's return, especially in the short term.
Comparing Mutual Funds
Finally, there is important information individuals need to be aware of before investing in a mutual fund:
- Compare fees before purchasing shares in a fund, not all mutual funds are managed in the same manner, and high fees will lower your investment returns.
- Examine the history of the mutual fund. How long has the company been in business, and how did it perform in bear and bull markets versus its peer group?
- Carefully consider the fund's volatility and risk. Understand your investments, so that you understand the risk you are taking. If the returns were high in the past, that does not guarantee they will be high in the future.
Mutual fund investing is a great way to ease into investing in stocks. However, the simplicity of opening a mutual fund account does not relieve the smart investor from the process of conducting their research before investing their money.
Buying Mutual Funds
If you're new to investing, and think that mutual funds are the easy way to get started in the stock market, then you have the story half right. While investing in a mutual fund requires a lot less research, that doesn't mean you can choose any fund and be successful.
Our final suggestion is that you become an educated consumer of mutual funds. To do so, you should be familiar with the terms, fees, as well as various ways to evaluate mutual funds. Fortunately, we can help there too with our "buying mutual funds" series:
About the Author - Investing in Mutual Funds
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