A mutual fund is managed by an investment company that invests (according to the fund’s objectives) in stocks, bonds, government securities, short-term money market funds, and other instruments by pooling investors’ money. Mutual funds are sold in shares. Each share of a fund represents an ownership in the fund’s underlying securities (the portfolio).
By law, mutual funds must calculate the price of their shares each business day. Investors can sell their shares at any time and receive the current share price, which may be more or less than the price they paid.
When a fund earns money from dividends on the securities it invests in or makes money by selling some of its investments at a profit, the fund distributes the earnings to shareholders. If you’re an investor, you may decide to reinvest these distributions automatically in additional fund shares. A mutual fund investor makes money from the distribution of dividends and capital gains on the fund’s investments. A mutual fund shareholder also can potentially make money as the fund’s share per share (called net asset value, or NAV) increases in value.
NAV of a mutual fund = (Assets - Liabilities) ÷ Number of shares in the fund
(Assets are the value of all securities in a fund’s portfolio; liabilities are a fund’s expenses.) The NAV of a mutual fund is affected by the share price charges of the securities in the fund’s portfolio and any dividend or capital gains distributions to its shareholders.
Unless you’re in immediate need of this income, which is taxable, reinvesting this money into additional shares is an excellent way to grow your investments.
Shareholders receive a portion of the distribution of dividends and capital gains, based on the number of shares they own. As a result, an investor who puts $1,000 in a mutual fund gets the same investment performance and return per dollar as someone who invests $100,000.
Mutual funds invest in many (sometimes hundreds of ) securities at one time, so they are diversified investments. A diversified portfolio is one that balances risk by investing in a number of different areas of the stock and/or bond markets. This type of investing attempts to reduce per-share volatility and minimize losses over the long term as markets change. Diversification offsets the risk of putting your eggs in one basket, such as technology funds.
A stock or bond of any one company represents just a small percentage of a fund’s overall portfolio. So even if one of a fund’s investments performs poorly, 20 to 150 more investments can shore up the fund’s performance. As a result, the poor performance of any one investment isn’t likely to have a devastating effect on an entire mutual fund portfolio. That balance doesn’t mean, however, that funds don’t have inherent risks: You need to carefully select mutual funds to meet your investment goals and risk tolerance. The performance of certain classes of investments — such as large company growth stocks — can strengthen or weaken a fund’s overall investment performance if the fund concentrates its investments within that class. If the overall economy declines, the stock market takes a dive, or a mutual fund manager picks investments with little potential to be profitable, a fund’s performance can suffer.
Unfortunately, unless you have a crystal ball, you have no way to predict how a fund will perform, except to look at the security’s underlying risk. If a fund has existed long enough to build a track record through ups and downs, you can review its performance during the last stressful market. Fortunately for all investors, some companies use a statistical measure called standard deviation, which measures the volatility in the fund’s performance. The larger the swings in a fund’s returns, the more likely the fund will slip into negative numbers.
Companies that track funds’ standard deviations include Morningstar Mutual Funds and Value Line Inc., which are mutual fund reporting and ranking services whose newsletters are available in most libraries. You can visit their Web sites at www.morningstar.com and www.valueline.com, respectively.
By law, mutual funds must calculate the price of their shares each business day. Investors can sell their shares at any time and receive the current share price, which may be more or less than the price they paid.
When a fund earns money from dividends on the securities it invests in or makes money by selling some of its investments at a profit, the fund distributes the earnings to shareholders. If you’re an investor, you may decide to reinvest these distributions automatically in additional fund shares. A mutual fund investor makes money from the distribution of dividends and capital gains on the fund’s investments. A mutual fund shareholder also can potentially make money as the fund’s share per share (called net asset value, or NAV) increases in value.
NAV of a mutual fund = (Assets - Liabilities) ÷ Number of shares in the fund
(Assets are the value of all securities in a fund’s portfolio; liabilities are a fund’s expenses.) The NAV of a mutual fund is affected by the share price charges of the securities in the fund’s portfolio and any dividend or capital gains distributions to its shareholders.
Unless you’re in immediate need of this income, which is taxable, reinvesting this money into additional shares is an excellent way to grow your investments.
Shareholders receive a portion of the distribution of dividends and capital gains, based on the number of shares they own. As a result, an investor who puts $1,000 in a mutual fund gets the same investment performance and return per dollar as someone who invests $100,000.
Mutual funds invest in many (sometimes hundreds of ) securities at one time, so they are diversified investments. A diversified portfolio is one that balances risk by investing in a number of different areas of the stock and/or bond markets. This type of investing attempts to reduce per-share volatility and minimize losses over the long term as markets change. Diversification offsets the risk of putting your eggs in one basket, such as technology funds.
A stock or bond of any one company represents just a small percentage of a fund’s overall portfolio. So even if one of a fund’s investments performs poorly, 20 to 150 more investments can shore up the fund’s performance. As a result, the poor performance of any one investment isn’t likely to have a devastating effect on an entire mutual fund portfolio. That balance doesn’t mean, however, that funds don’t have inherent risks: You need to carefully select mutual funds to meet your investment goals and risk tolerance. The performance of certain classes of investments — such as large company growth stocks — can strengthen or weaken a fund’s overall investment performance if the fund concentrates its investments within that class. If the overall economy declines, the stock market takes a dive, or a mutual fund manager picks investments with little potential to be profitable, a fund’s performance can suffer.
Unfortunately, unless you have a crystal ball, you have no way to predict how a fund will perform, except to look at the security’s underlying risk. If a fund has existed long enough to build a track record through ups and downs, you can review its performance during the last stressful market. Fortunately for all investors, some companies use a statistical measure called standard deviation, which measures the volatility in the fund’s performance. The larger the swings in a fund’s returns, the more likely the fund will slip into negative numbers.
Companies that track funds’ standard deviations include Morningstar Mutual Funds and Value Line Inc., which are mutual fund reporting and ranking services whose newsletters are available in most libraries. You can visit their Web sites at www.morningstar.com and www.valueline.com, respectively.
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