Mutual Funds
Once you've decided to invest in the stock market, mutual funds are an easy way to own stocks without worrying about choosing individual stocks.
Tap into long-term growth potential!
Financial experts recommend mutual funds as a good option for people with long-term financial goals:
Long-term growth potential.
If your retirement is several years away, consider the long-term growth potential offered through mutual funds.
Wide range of investment options.
Retirement experts can help you select mutual funds that meet your needs. If you're interested in a IRA Rollover, they can help create an investment mix similar to your old employer's retirement account.
Or, help find investments more tailored to your current situation and retirement goals.You have the flexibility to contribute when you'd like. And, the freedom to invest as much as you'd like (within annual limits).
Risk Reduction
Diversify your investments to help reduce your financial risk.
Mutual Funds, is an investment company or trust that has a very fluid capital stock. It is unique in that at any time it can sell or redeem any of its outstanding shares at net asset value (i.e., the price of a share equals total assets minus liabilities divided by the total number of shares).
A mutual fund, also called an open-end investment company, owns the securities of several corporations and receives dividends on the shares that it holds. A closed-end investment company differs from an open-end company in that the number of shares is limited and the price of the shares may fluctuate above and below the net asset value.
The earnings of a mutual fund are distributed to the holders of its shares. It is hoped that a loss on one holding will be made up by a gain on another. The holders of mutual-fund shares thus gain the advantage of diversification, which might ordinarily be beyond their means.
Common mutual funds, which often provide skilled management for security holdings, include stock, bond, balanced, index, and money-market funds. Stock funds mainly invest in common shares, and bond funds in bonds; such funds may specialize in a particular category of stocks or bonds (such as Internet stocks or municipal bonds). A balanced fund might invest in preferred stocks and bonds in addition to common stocks. Index funds invest in a portfolio that mimics a given index, such as the stocks that make up the S&P 500.
What Is A Mutual Fund?:
But what is a mutual fund? It's not complicated. A dictionary definition of a mutual fund might go something like this: a single portfolio of stocks, bonds, and/or cash managed by an investment company on behalf of many investors.
A mutual fund is just a convenient package or basket for a lot of investments—mainly stocks and bonds—that would be complicated for the typical investor to manage otherwise. Mutual funds are the way the masses invest in the stock market.
They are a cheap, easy and efficient way for people without a lot of money or financial experience to take advantage of stocks and bonds.
How Does A Mutual Fund Invest My Money?:
The investment company is responsible for the management of the fund, and it sells shares in the fund to individual investors. When you invest in a mutual fund, you become a part owner of a large investment portfolio, along with all the other shareholders of the fund. When you purchase shares, the fund manager invests your funds, along with the money contributed by the other shareholders.
One manager (or sometimes a team) manages a pool of millions or even billions of dollars in a mutual fund. That’s much cheaper than all those thousands of investors hiring a broker to manage their money individually. Mutual funds are all about bulk. Mutual funds allow investors who start with a little bit of money, yet spread their investment around widely. That makes it much less risky than investing in one or two stocks.
Every day, the fund manager counts up the value of all the fund's holdings, figures out how many shares have been purchased by shareholders, and then calculates the Net Asset Value (NAV) of the mutual fund, the price of a single share of the fund on that day. If you want to buy shares, you just send the manager your money, and they will issue new shares for you at the most recent price. This routine is repeated every day on a never-ending basis, which is why mutual funds are sometimes known as "open-end funds."
But exactly how does a mutual fund's NAV increase?
If the fund manager is doing a good job, the NAV of the fund will usually get bigger -- your shares will be worth more. There are a couple of ways that a mutual fund can make money in its portfolio. (They're the same ways that your own portfolio of stocks, bonds, and cash can make money).
- A mutual fund can receive dividends from the stocks that it owns. Dividends are shares of corporate profits paid to the stockholders of public companies. The fund might have money in the bank that earns interest, or it might receive interest payments from bonds that it owns. These are all sources of income for the fund. Mutual funds are required to hand out (or "distribute") this income to shareholders. Usually they do this twice a year, in a move that's called an income distribution.
- At the end of the year, a fund makes another kind of distribution, this time from the profits they might make by selling stocks or bonds that have gone up in price. These profits are known as capital gains, and the act of passing them out is called a capital gains distribution.
- Unfortunately, funds don't always make money. If the fund managers made some investments that didn't work out, selling some investments for less than the original purchase price, the fund manager may have some capital losses.
Everyone hates to have losses, and funds are no different. The good news is that these losses are subtracted from the fund's capital gains before the money is distributed to shareholders. If losses exceed gains, a fund manager can even pile up these losses and use them to offset future gains in the portfolio.
That means that the fund won't pass out capital gains to shareholders until the fund had at least earned more in profits than it had lost. (Although you might want to reconsider your decision to remain invested in a fund that's losing money if the rest of the market is growing).
Where Did Mutual Funds Come From?:
The forerunner of the modern mutual fund was established in Belgium in 1822, and the use of these closed-end investment companies soon spread to Great Britain and France. Mutual funds started in the U.S. as a novel investment vehicle for a few hundred Massachusetts in 1924. Today mutual funds are a major force in financial markets. Mutual funds hold 27 % of the outstanding stock regularly traded in the U.S. About $12.3 trillion are held in mutual funds, about half of which is in stock funds, according to the Investment Company Institute, the mutual fund industry trade group. The group counts 8,067 mutual funds, including 4,821 stock market funds, 1,944 bond funds, 495 funds that are a hybrid of stocks and bonds and 807 money market funds.
Why Do So Many People Invest in Mutual Funds?:
Mutual funds are growing more popular as traditional pension funds disappear. Workers used to just count on their employer to guarantee certain payment for the duration of their retirement. Now the responsibility is shifting to workers to manage their own money, either in 401(k) accounts through work or Individual Retirement Accounts on their own. In 2007 about 44 % of U.S. households owned a mutual fund. Mutual funds made up about 26 % of all U.S. retirement savings and 47 % of IRAs.
Not sure if mutual funds are right for you?
WaterStates offers a full line of Financial Planning Services for businesses and individuals by referral through, an associate who is a registered representative, who has a Finance Degree and has attained his Series 7 and Series 63 licenses.