What You Should Know Before You Invest In Mutual Funds

ople have heard the term 'mutual funds' but fewthat will affect a stocks future from legislation to
have actually used this as an investment medium.competition and millions of things in between that
Most small investors however have a very limitedaren't limited to technological advances and
understanding of mutual funds that goesscientific breakthroughs. Thus the higher risk
something like this a mutual fund is a “pool ofnature of this particular type of investment.
money invested in stocks or interest bearingUnderstanding NAV
instruments” by those who are experts in theThe first thing I should do here is explain what
field. I don't know about you but I would need aNAV stands for: the Net Asset Value of mutual
little more than this definition in order to investfunds. This value is declared on a daily basis and is
my hard earned money or stake my retirementthe simple difference between assets and liabilities
on the word of one other person. The truth isof the fund at the end of each day. The value is
that many of those who invest in mutual fundsexplained per unit and this is how the purchase
experience very real gains as the result of theirprice of the units are determined.
venture.The Investment Decision
What Exactly is a Mutual Fund?With so many mutual funds on the market you
On a broad scope, mutual funds are an avenue inreally need to study the funds you are considering
which you can invest a small amount of moneybefore you take the plunge so to speak (as this is
with the potential of owning higher priced stocksdefinitely the opposite of your goal)? Seriously,
and bonds that would under other circumstanceswhat parameters should you base your decision
only be available in large lots that you couldn'ton? While there are no hard and fast rules when
afford on your own. The way in which thisit comes to investing, the following advice might
happens is through many people pooling thepoint you in the right direction.
money to buy larger chunks of stock at lowerThe investors approach. It really helps when
prices. An example would be that the XYZinvesting if you are a very self-aware type of
Widget Company has stocks trading at $10 perperson. Knowing yourself helps you understand
share and you would like to invest $100 in thisyour intentions and establish proper goals for your
company. The problem is that XYZ Company hasinvestment strategy. Knowing yourself also helps
a lot size of 1000 shares, which would costyou identify how much of a risk you are actually
$10,000. Mutual funds can pool together the $100willing to take. If you are an aggressive investor
of 100 people in order to meet the minimumand are comfortable with the risks involved but
requirement.hoping for short run profits, you may wish to
Types of Mutual Fundstake things one step further and go with sector
We have seen many evolutions in the stockspecific funds. Just remember these are highly
market since its inception. Mutual funds havespeculative and can bring big profits quickly but
lasted through many of the changes we havewhen the numbers begin to fall, they tend to fall
seen over time and show no real sign of faltering.equally fast, which can result in heavy losses.
Below you will find a brief description of theThe Pedigree. As you study mutual funds you will
various types of mutual funds currently on thelearn that the past can often forecast the future.
market.For example, the dot com crash wasn't a one
Equity Funds. These funds deal with equity sharessize fits all fiasco. There were some stocks that
of corporations. They carry not only high risks butseemed slow and steady throughout who
also the opportunity for high rewards. Dependingweathered the financial fallout of the overall
on the industry involved, these funds may beindustry. Your fund manager will have a lot to do
sector oriented (technology funds will invest inwith the profits and risks that you will accrue with
emerging technologies for example) or diversifiedyour mutual fond. Conservative fund managers
meaning they consist of many funds fromtend to invest slow and steady with minimal risks,
different sectors.they will not make aggressive trades even in
Debt Funds. As their name applies these fundssector specific funds.
deal primarily with debt-oriented mediums (thoseThe age and size of the fund are other mitigating
that carry interest). These funds invest infactors when it comes to the decision making
Treasury Bills, bonds, and other governmentprocess. New funds may post heavy gains in the
papers. These investments are relatively low riskbeginning but are often unable to stay the course
since there is a guaranteed return in the form ofonce the test of time steps in. It is best,
interest however the rewards are somewhatparticularly for conservative investors to adopt a
limited as they are not based on marketmore cautious approach when dealing with new
movement. They are not 'fool proof' or risk freefunds unless those managing the funds have a
but they are a very safe investment for thesterling reputation from previous work.
tortoise type of investor beginning early or thoseThe Financials. The most important factor when
with a sizable nest egg not worth putting in toomaking decisions regarding whether or not to
much risk.invest in a Mutual Fund is the financial situation and
Balance Funds. These funds are perhaps the mostforecast. Many things should go into your decision
interesting as they offer security along with amaking process not the least of which are the
balanced diet of risk. With this type of investingpast performance of a fund, the current trend of
you would set a predetermined ratio of investingearning, operating expenses, and entry or exit
(60% debt funds and 40% equity funds is a goodloads. Each one of these factors is very important
safe ratio but it is up to the investor) and investand none of them should be overlooked during
according to your comfort zone of risk andthe decision making process.
security. This type of investing offsets the risk ofDiversification. We have all been warned of the
equity investing while living a little on the edge indangers that go along with putting all of your eggs
hopes of great payoffs down the road whileinto one basket and many learned this lesson the
enjoying the security of debt funds-literallyhard way during the dot com crash of the
offering the best of both worlds to investors.nineties. Before investing in a fund you should take
Each of the types of investing mentioned abovea moment to see exactly how diverse the fund
has pros and cons and the answer of which is thereally is. You could always elect to invest some of
best is a question that only you can answer. Thisyour money in one fund and other amounts of
is your retirement, future, nest egg, or kid'smoney elsewhere. I always recommend keeping
college fund so only you can decide what ansome money invested in debt oriented funds
acceptable risk is. If you are willing to gamblerather than all monies invested in equity funds.
equity funds might be best, if you'd prefer aThis allows some degree of security so that all is
surer bet, then debt funds might be best. If younot lost over a deal gone wrong. The benefit of a
have a little bit of adventure but don't want todiverse portfolio that invests in multiple sectors is
'risk it all' then perhaps the balance fund is yourthat if one industry takes a huge hit you may be
best destination.able to cover your losses with the other items in
Price Determinationyour portfolio.
Once you have a basic understanding of theMonitoring. Contrary to popular belief, mutual fund
available options, the next step lies ininvesting isn't about making an investment and
understanding the price and how it is determined.leaving the rest to the experts. You must
The income of mutual funds is generally acquiredcontinuously and constantly keep an eye towards
in the form of interest, dividends, and trading. Inthe bottom line in order to insure that your best
debt securities however interest income is all butinterests are being served. No one is infallible,
assured. This is not the case when dealing withexperts included. Follow the NAV reports on a
equity stocks and the dividend in these situationsdaily basis in order to protect your interests.
depends on the profits earned by the companyRemember that no one is going to care for your
among other factors.interests quite the way you will.
When investing in debt funds it may be that yourWhile the pointers mentioned above are on the
best interest would not be a mutual fund. If youmark they are by no means all inclusive. Investing
can afford the investment without the mutualin mutual funds is a gamble like any other kind of
fund you should determine which would be bestinvesting. Be certain that you aren't risking more
for your situation. You want to choose the routethan you are willing to loose but diligently guard
that will offer you the higher reward. Keep in mindwhat you do invest in hopes of avoiding loss.
that market trends do not carry quite the weightUltimately, experience is the greatest teacher
when dealing with debt funds, as they will withwhen it comes to investing and some mistakes
equity funds.will simply need to be made in order to learn and
Equity funds offer trading that is based on thegrow. We all make them and some are painful.
perception of the fund manager as to what theHopefully the information above will help you
market is preparing to do and the current risksminimize your losses while maximizing your gains.
vs. the potential reward. There are many things