| Many people have heard of mutual funds but few | | | | payment is called distribution. The second way is |
| really understand what they are or how they | | | | by the selling of stocks. The managers will |
| function. The basic definition of a mutual fund is a | | | | routinely sell stocks when their price hits a certain |
| collection of bonds and/or stocks that are | | | | amount, and the profits will be passed on to the |
| professionally managed. The manager will research | | | | investor. The last way to make money is a little |
| stocks and other mutual funds. He or she is also | | | | complicated, but in essence, the investor can sell |
| responsible for all the purchase and sale of stocks | | | | his or her mutual fund. |
| and bonds. | | | | Disadvantages |
| Advantages of Mutual Funds | | | | Though mutual funds can be seen as one of the |
| One of the most obvious advantages to having a | | | | least risky ways to invest in the stock market, |
| mutual fund is the investments are already | | | | there are some very real disadvantages that |
| diversified. This diversification will result in the | | | | should be taken under consideration. It is |
| mutual fund spreading out the risk of investment | | | | important to remember that while the |
| through several sectors. In reality, if one stock | | | | professional fund manager may be well qualified, |
| does not do as well, there will be others that will | | | | he or she is still human, and can make mistakes. |
| do relatively well which will make the loss more | | | | While this may not result in a major loss, it does |
| manageable. | | | | have the potential of costing the investor money. |
| Another great advantage is that investors who | | | | Remember that the manager will still be paid no |
| purchase a mutual fund will have professional | | | | matter how the mutual fund performs. |
| managers. He or she will monitor the portfolio so | | | | One more disadvantage is the complexity of the |
| the investor will get the most for their money. As | | | | mutual fund itself. This can result in many of the |
| most investors will attest, the cost of trading is | | | | costs associate with the fund being unclear, and |
| usually bothersome at best and discouraging at | | | | this can be compounded if the manager does not |
| worst. Purchasing a mutual fund will make trading | | | | have a clear understanding of changing markets. |
| costs more manageable because stocks are | | | | Over the years, there has also been some |
| bought and sold on a large scale. | | | | questions raised about the over diversification. |
| One of the best aspects of a mutual fund is the | | | | While some diversification is needed to protect |
| simplicity of purchase. Since most banks have | | | | mutual fund owners, if a mutual fund does not |
| their own line of mutual funds, purchasing one | | | | have enough holdings in companies that are |
| may be a simple as going to your financial | | | | experiencing high returns, then the overall return |
| institution. Mutual funds also usually carry a small | | | | on investment could still be low. Lower than |
| investment requirement, which means that more | | | | expected returns can also occur when the mutual |
| investors have the ability to consider this as a real | | | | fund is doing too well and the manager cannot |
| option. | | | | find enough good investments to reinvest. |
| Earning Money | | | | Most professional managers will not take into |
| Earning money with a mutual fund can be done in | | | | consideration individual tax situations before |
| three different ways. The first and simplest way | | | | making financial decisions. If the fund manager |
| is to wait. This means that the stocks will pay | | | | sells a security, it may be in the owner’s best |
| dividends, the bonds will pay interest, and this | | | | interest to defer a capital gains liability. |