If you want to start investing in the market, the easiest and least stressful way would be to invest in mutual funds. In fact, more and more people are now investing in mutual funds compared to earlier years. This article explains what mutual funds are, which ones to invest in, and a few other factors to consider so you have a better understanding of this type of investment before you actually start.
What is a mutual fund?
Simply put, a mutual fund is a pool of money provided by investors, who may be individuals, companies, or other organizations. State and federal securities laws govern mutual funds. Some statutes regulate the organization of investment companies as well as the sale of securities by brokers and dealers. Federal securities laws that regulate mutual funds include the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Company Act of 1940.
Mutual funds are actively managed by a professional fund manager, whose responsibility is to constantly monitor the stocks and bonds in the fund’s portfolio. A fund manager is a professional that invests the cash which the investors have contributed. Their main role is to dedicate time into selecting the right investments for their investors, and hiring one can greatly give you peace of mind, knowing that your investments are in good hands and leaving the tasks of analyzing financial statements or calculating financial ratios to the experts.
The goal of the fund manager depends upon the type of mutual fund he is working with. For example, a fixed-income fund manager would work at providing the highest yield at the lowest risk; while a long-term growth manager, would strive at beating the Dow Jones Industrial Average or the S&P 500 in a fiscal year.
Mutual funds are divided along four lines: closed-end and open-ended funds, load and no load:
Closed-End Funds vs. Open-End Funds
A closed-end fund has a fixed number of shares issued to the public through an initial public offering that are traded on the open market. With this, and considering the fact that a closed-end mutual fund does not redeem or issue new shares like a normal fund, makes the fund shares dependent on the laws of supply and demand. Consequently, shares of closed-end mutual funds usually trade at a discount to net asset value.
Majority of mutual funds are open-ended, meaning that the fund does not have a fixed number of shares. The fund issues new shares to the investor based on the current net asset value and redeem the shares when the investor opts to sell. As shares are created and destroyed as necessary, open-end mutual funds always reflect the net asset value of the fund’s underlying investments.
Load vs. No Load
A load refers to a sales commission. If a fund charges a load, the investor pays the sales commission on top of the net asset value of the fund’s shares. No load funds tend to generate higher returns for investors because of the lower expenses associated with ownership.
Every mutual fund has a specific investing strategy, style, and purpose, and finding a mutual fund that fits your investment criteria and style is essential. You must know and understand your investment.