| Mutual funds are one of the financial world's | | | | sometimes called a "load." |
| most popular investment vehicles, and for | | | | |
| good reason. | | | | Essentially, you are paying them to have the |
| | | | heartburn and ulcers associated with watching |
| For a relatively small investment, these | | | | the stock market eight hours a day, 52 weeks |
| funds give individual investors the ability | | | | a year, so that you don't have to. Whether or |
| to buy a diverse portfolio of stocks and / or | | | | not the fund managers earn their keep depends |
| other financial instruments - all in one | | | | on how skillful they are, and how the fund's |
| transaction. | | | | fees are structured. |
| | | | |
| If you have just two or more mutual funds, | | | | Load mutual funds charge either front-end |
| chances are that you're more than adequately | | | | loads or back-end loads. Front-end loads |
| diversified. This means that you don't have | | | | charge you a percentage of your initial |
| to worry about one bad apple (i.e. Enron) | | | | investment. |
| destroying your entire investment account. | | | | |
| | | | For example, if you invest $10,000 each into |
| How Mutual Funds Work | | | | a pair of front-end load funds with loads of |
| | | | 3 percent and 5 percent, you will only be |
| So how do these funds work? Each fund is | | | | investing $9,700 and $9,500, respectively. |
| actively managed by a mutual funds | | | | How long will it take your funds to make up |
| professional. This is someone who has several | | | | the $800 you've lost right off the bat? |
| years of experience analyzing and trading | | | | |
| stocks or other securities, probably has an | | | | Instead of charging you up front, back-end |
| advanced degree, and has worked his or her | | | | load funds don't charge you a load until you |
| way up the ladder to what is essentially the | | | | withdraw your money. |
| top of the money management profession. | | | | |
| | | | These funds are usually a better deal, |
| The fund manager chooses the securities that | | | | because the size of the loads usually |
| the mutual fund owns. These funds can be | | | | decreases the longer you leave your money in |
| composed of stocks, bonds, and / or other | | | | the fund. |
| financial instruments. | | | | |
| | | | For example, a back-end load fund might have |
| The types and balance of securities (i.e. 60 | | | | a load of 7 percent if you withdraw your |
| percent stocks, 35 percent bonds, 5 percent | | | | money the first year, with the load going |
| cash / money market), and the investment | | | | down by 1 percentage point each year, and |
| objectives and strategies (i.e. aggressive | | | | reaching 0 percent by the eighth year. |
| growth or equity income) are listed in the | | | | |
| mutual fund's prospectus. | | | | Mutual Funds - Just Say No To Your Broker; |
| | | | Buy Direct Instead |
| This way investors know what they are getting | | | | |
| into each time they buy new mutual funds. | | | | Typically, full-service brokers with offices |
| | | | on Main Street only sell front-end load |
| Mutual funds are split into shares, just like | | | | funds. This is because they receive an |
| stocks. For example, a fund may own 5,000 | | | | up-front commission on the sale of these |
| shares of Microsoft (MSFT); 10,000 shares of | | | | products. |
| General Motors (GM); 20,000 shares of Alcoa | | | | |
| (AA), etc., and be split into 100 million | | | | Mutual funds are designed for average |
| shares itself. | | | | investors - you don't need a broker to |
| | | | recommend these funds for you, and you don't |
| If the net asset value (NAV) of the shares is | | | | need to pay the extra sales charges. |
| $1 billion, then each share of the fund would | | | | |
| be worth $10. The fund manager buys and sells | | | | There are hundreds of good, no-load funds |
| shares of stock that the fund owns - you, in | | | | that charge only a small annual management |
| turn, can buy or sell your shares of the | | | | fee (which load mutual funds charge in |
| fund, but only at the end of each trading | | | | addition to their loads) available directly |
| day. | | | | from fund companies. |
| | | | |
| No Load Mutual Funds vs. Load Mutual Funds | | | | Most funds have a minimum investment of |
| | | | $2,500, but this can usually be waved if you |
| So what's the catch? Well, mutual fund | | | | commit to regular monthly investments of as |
| managers have to be compensated for their | | | | little as $50. |
| services, so they charge you a fee which is | | | | |