A Brief Overview of Mutual Funds?

Answer 1

Mutual funds are a very popular investment vehicle for many people. Mutual funds pool the money of a large number of investors and invest the money in securities These securities are typically stocks, bonds, and money market instruments, although other types of securities can be purchased as well. The types of mutual funds available and the number of different strategies that they use have proliferated in recent years.

Advantages and Disadvantages of Mutual Funds

The primary advantages of mutual funds is that they offer diversification and professional management. Investors who buy individual stocks must attempt to select stocks that will do well, which is often difficult. Buying stocks puts all of the investor's money in one or a few baskets. Mutual funds eliminate this drawback. By investing in a larges number of securities, the negative effects of few poor performing stocks are minimized. If an investor wants to invest in oil, for example, he can either try to select the oil companies that will do well, or he can purchase a mutual fund that buys stocks across the oil sector. With this type of mutual fund, the investor can own a piece of all of the oil companies as well as peripheral business like oil services. Investors can make diversified investments for just about any investment strategy. People who own mutual funds also have a professional manager working for them who has a great deal of experience and training in selecting which securities to buy with the pooled money. The biggest disadvantages of mutual funds are that they can only be bought and sold at the end of the trading day, and they have a number of difficult to comprehend fees.

Charges and Fees

With regard to sales charges, mutual funds are divided into two general categories. Load funds charge a commission or sales charge whereas no-load funds do not. Load funds are generally sold by full-service brokerage firms and financial planners while no-load funds are usually purchased through the fund company itself or through a discount brokerage firm. The fee structure of a fund is explained in the fund's prospectus, and investors should carefully study a fund's fees because they can be complex. The management fee is the money paid for the management of the fund's holdings. Non-management expenses include such things as legal expenses, printing and mailing costs, office expenses, customer service costs, and custodial charges among other things. 12b-1 fees pay for the marketing and sales costs of the funds, while non-12b-1fees can cover things like distribution costs. In is the 12b-1 and non-12b-1 fees that are the most complex and hardest to understand, and they can vary quite a bit among funds. It is important for investors to consider net gains when evaluating mutual funds since funds that have lower gross gains may actually outperform funds with higher apparent gains that charge higher fees.