Mutual Funds are somewhat self-explanatory. They are investment companies that make investments on behalf of individual investors. Money managers are paid to make daily decisions on which securities best suit the purpose of the fund. The investor has the responsibility to decide which category of investment is most suitable. A growth fund, for example would consist of larger companies that have a history of increased value. Shares can be purchased or sold on any business day at the offer price of the shares. When selling shares, the account holder receives the bid – or selling price – of each share. In the case of “no load funds”, the offer and the bid are the same. Transactions in and out of mutual funds are confirmed at the end of each trading day. Each account holder receives a pro-rata amount of gain or loss per the performance of the entire pool. For example, if you invest $1000 in a mutual fund, and the fund gains 10% in value over a given period, your investment would be worth %1100. Since funds invest in 50 to 70 different securities, and the investments are expertly managed, your downside is minimized greatly. However, your upside is also controlled by the total growth in all the securities in which the fund is invested…whcih brings us to an argument against investing in large pools of money like mutual funds.
When the market is down, mutual funds that invest in companies representing a market index, such as the Dow Jones Industrial Average, will follow the direction of the index. In a market downturn, the trend is not desirable. For the investor that wishes to escape prolonged downward slides, like the one that took place between years 2000 and 2003, you would need to sell you shares (e.g., exchange the shares into a money market account). Otherwise, all prior gains could be wiped out by subsequent reductions in value. Since the performance of most mutual funds is mirrored by market trends, it would be prudent to monitor your monthly, quarterly and annual gains and losses.
A sensible alternative is to invest in individual stocks or bonds that have a solid history of growth. A good stock will often outperform a highly rated mutual fund over short periods of one to two years. If the idea of investing in single issues is not appealing, investment trusts and bundled securities such as ETFs might make since. In today’s market a clear investment plan is more critical than ever. With the right kind of investigation, investors can learn to make intelligent decisions own their own or with a little help at the beginning. Under current market conditions, it’s a good idea to seek advice from a reputable broker or investment advisor.