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 This publication, so insensitively named Mutual Funds for Dummies, will complete our "dummies" series in this section of the publication. We have already covered topics such as stocks and investing - and now we are rounding out our dummies section with this dummies article on mutual funds.
We are also going to follow the same format as our prior articles of this type, and offer you just enough information to get started investing in mutual funds.
Why Mutual Funds for Dummies?
The fact that so many people look for simplified explanations tell us two things:
- People are busy doing what they do best and are looking to reduce the total amount of information they need absorb. We live in the information age and the "dummies" approach helps to distill information down into more manageable chunks.
- Investors recognize the value of mutual funds and want to understand how to get started in this area.
We realize that some of our readership might be offended by a title like "Mutual Funds for Dummies," but we also know that some people appreciate this simplified approach to sharing information. So for those of you that are offended, we offer our apologies. And for those of you looking for simplified information on mutual funds - just keep reading.
Risk and Mutual Funds
Investing in mutual funds is pretty easy; in fact it is much easier than investing in stocks. That's because when you purchase a mutual fund, you are really purchasing a portfolio of stocks and / or bonds - and that lowers your risk. When you purchase an individual stock in a company, you are really taking on two kinds of risk.
- The first risk has to do with the risk associated with a single company. For example, that company can have operating problems and miss their earnings targets. This will cause their stock price to decline.
- The second risk has to do with more macroeconomic risks - the entire industry could suffer a downturn or the entire stock market could enter a bear market.
Mutual funds allow you to eliminate most of the risk associated with individual stocks through the portfolio concept. By holding more stocks or securities in a portfolio, you lower your overall exposure by spreading out the risk.
Mutual Fund Research
Unfortunately, even dummies need to do their research. Sorry, but if there is one short cut that should be avoided, it is not mutual fund research. Fortunately, we have three articles that can help you to get a jump start in this area:
- Mutual Fund Rating - this article discusses the most commonly used and arguably the most famous system used rating for mutual funds - the Morningstar system.
- Mutual Fund Research - this article is a good place to get a feel for the types of mutual funds that are available to the investor.
- Mutual Fund Performance - finally, this article discusses how you can go about determining a mutual fund's performance and what to look out for when evaluating performance.
Mutual Fund Fees
The price of one share of a mutual fund is usually quoted in terms of NAV or Net Asset Value - a number that can be found online or in the newspaper. Investing in mutual funds is usually pretty easy since most brokerage houses allow you to add money through automatic withdrawals from a bank account. This can help you build up your investment portfolio in a less painful manner.
Perhaps the most important short-term consideration to take notice of is the fee structure of a mutual fund. We've discussed this in more detail in No-Load Mutual Funds and Mutual Fund Loads, but if the mutual fund carries an upfront fee - let's say 5%, then you are automatically starting with a pretty significant loss on your investment. In almost all situations, no-load funds are really the way to go.
Finally, mutual funds also charge management fees. These fees are used to pay the trading costs and management salaries of those individuals running the fund. You want to make sure that the fund fees are low. As a guide, a good mutual fund index fund will have fees in the 0.5% range while a domestic stock fund might be around 1.20%. Index funds are not actively traded while domestic stock funds can be pretty actively traded - so these two values should give you a good feel for the range of mutual fund fees that are acceptable.
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