01/02/2007

Mutual Funds – The Basics

by Karen Willis

Mutual funds are a type of investment that are an uncomplicated purchase for beginners and seasoned vets alike. Mutual fund investments do not require one to spend countless hours sifting through individual stock or do you have to shell out your life's savings to start. The funds are managed by an investment firm on behalf of each shareholder with the number of shares purchased controlled by the individual. Read on if you're curious about what exactly a mutual fund is, how to invest in them, and most importantly, how the put dollars back in your wallet.

What are mutual funds? Mutual funds are shares purchased by a group of investors who pool their money together with preset investment goals in mind. A fund manager will typically invest the money into stocks and bonds. If you decide to invest in a mutual fund, you are buying a share of the mutual fund, thus becoming a shareholder.

Stocks and bonds make up a bulk of mutual fund investing. If the investment manager decides to put the money towards stocks, it simply means you and the other mutual fund investors purchased a share(s) of a particular company. Stocks are considered riskier investments (more so than bonds or money market funds) depending on the economic climate at the time.

Bond investments are short-term, intermediate-term, and long-term investments. When you purchase a bond, you are technically lending money to a company or government organization - or issuers - for a variety of reasons, all to raise capital. The investor earns money off the bond by the issuers repayment with an additional interest rate. The most common bonds are:

Municipal Bond Funds -Are non-taxable and are issued by state and local governments.

Mortgage-Backed Securities Funds - investment goes towards government-sponsored agencies like Ginnie Mae, who raises capital for home-owners.

Corporate Bond Funds -bonds issued by corporations and measured by an AAA to A minus rating.

U.S. Government Bond Funds - You're investing in federal government agencies such as the Student Loan Marketing Association and the Government National Mortgage Association. These groups raise money for a particular borrower including students and homeowners.

U.S. Treasury Bonds - are a safe bet (it's unlikely the federal government will run out of money).

How Do Mutual Funds Make Money?

Mutual funds are basically just a super-sized version of an individual portfolio and make money the same way. Your fund manager tallies the funds' values on a day-to-day basis and distributes the Net Asset Value (NAV) or the value of one share that particular day. Your shares can earn money from corporate dividends, loan paybacks from bond investments, or even by selling the stocks and bonds who's value's increased over the course of the year.

Where Do I Start Investing?

The internet is a good place to start if you're interested in mutual funds. Most major search engines (AOL, Yahoo!) have finance pages that not only provide informative articles but enable you to manage your mutual fund investments from your homepage. If you currently have a financial advisor, he or she will be able to answer any questions you have an steer you in the right direction.

If you're new to investing, mutual funds are a great way to start as they enable you to automatically diversify your portfolio with different types of investments that are often low risk.





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