29. July 2019

How Do Mutual Funds Work?

Two of the most asked questions are: How do mutual funds work and what are the best mutual funds available? It is a shame that so many people have such a limited knowledge of mutual funds because they are one of the best investment vehicles available for the average investor. They simplify the investment process and take most of the guess work out of investing.

 

Investing in foreign currency accounts.

 

So you ask, How do mutual funds work? Mutual funds take the money of thousands of investors, pool it together and then invest in a group of stocks. Therefore, each investor gets the advantages of professional management and diversification.

 

How most mutual funds work is they invest in hundreds of stocks which gives you automatic diversification. And of course each is run by a highly skilled manager which gives you instant professional management.

 

Mutual funds give you all the options of investing in stocks and they do the research for you. Mutual funds, like stocks, allow you to invest in certain sectors (biotech, healthcare, financial services), large caps, small caps, growth, conservative and any other category you can think of. But they do so without you having to figure out which stocks to buy.

 

When it comes to beginner investors who want to invest with little or no effort, mutual funds are the way to go.

 

Below are some more articles to go through that will teach you more about mutual funds. After reading these you will never have to ask "How do mutual funds work" again!

Definition of Mutual Funds

 

-Large Cap-

 

Dodge and Cox Stock, Five Year Average: 11% (2/06)

Marsico 21st Century, Five Year Average: 10.0% (2/06)

Hillman Focus Advantage, Three Year Average: 30.4%

-Small Cap-

 

CGM Focus, Five Year Average: 27% (2/06)

Fidelity Leveraged Company, Five Year Average: 23.1% (2/06)

Bridgeway Ultra Small Company, Five Year Average: 22.7% (2/06)

Hodges Fund, Three Year Average: 46.6% (2/06)

 

Overall, one of the best no load mutual fund companies is Fidelity. They offer a large variety of mutual fund that are no load and most have a very competitive yield.

 

When doing your own research make sure and look for no load funds that have a great three or five year yield. Do not just look for great one year yields. Every year there is a mutual fund that puts up incredible numbers and then the next year they give it all back. You are much better off looking for long term success rather than overnight success.

 

 

 

Definition of Mutual Funds

 

The definition of mutual funds: An open ended fund that is operated by an investment company. This company raises money from shareholders and then invests in various investment vehicles. Mutual funds raise money by selling shares of the fund to public investors (like yourself). A mutual fund will take the money they received and invest it in stocks, bonds and/or money market instruments.

 

OK, that mutual fund definition may have left you more confused then when you started. Here is a simpler definition. A mutual fund takes money from a large groups of individual investors, pools it together and then buys investments. Everyone who invested money then shares in any profits or losses of the fund in proportionate to the amount they invested and when they invested.

 

You may have noticed that in the first definition of mutual funds it stated "a open ended fund." This simply means that there is no limit to the number of shares that can be issued. Current or new investors can invest as much money as they want and the fund will simply issue new shares to them.

 

Conversely, a “closed ended” fund is similar to stock. Closed ended mutual funds issues a predetermined amount of shares in a initial public offering (IPO). After the IPO the shares then trade on a stock exchange. Closed ended funds are do not have to issue more shares like a open ended fund does.

 

Why do people invest in mutual funds? Mutual funds give investors the benefits of professional money management, diversification, convenience, liquidity and choice. This is what makes mutual funds so popular and attractive. These features are very hard to achieve by investing on your own. 

 

It is reported that around 90% of all investors own mutual funds in their portfolio. If you invest in a 401(k) at your job, it is very likely that you are investing in mutual funds. All in all, mutual funds are where most beginners as well as advanced investors should invest most of their money. They are fairly easy to understand and take most of the guess work out of investing, much as managed funds where traders trade for you.