Definition of Mutual Funds

The definition of mutual funds is the pooling of investors cash to buy securities. The most common types of securities purchased are stocks, bonds, and cash instruments. Currently, there is over 26 trillion dollars of investors money in many types of funds.
Individual funds are not limited to just stocks, bonds, and cash. Many funds pool money together to invest in real estate, gold, and other investments. Before mutual funds came along, these sectors were really hard and not worth investing for an individual investor.
Mutual funds can be separated into two categories, open-end and close-end. Open-end funds allow investors to be in and out of funds at any time with no fees or sales load. A close-ended fund has either a fee and or a sales charge for buying and/or a fee or a sales charge for selling.
Even though the definition of an open ended fund allows you to go in and out of the investment with no sales charge, both types of funds still have other ways in which they make money. The most common fee is an expense ratio, which can be found in the fund's prospectus. Expense ratios can vary widely, so make sure you do your proper homework before investing.
Each mutual fund has a manager, which directs the investments. Typically, the manager of each fund will have a specific purpose for the investments. For example, one fund's purpose might be outpacing a benchmark index, like the S&P 500, using growth stocks. Another funds purpose might be to provide a steady income during retirement using dividends stocks and bonds. Today, there is a fund for just about every time frame and risk tolerance imaginable.
Mutual funds allow an individual investor an easy way to diversify. Imagine the struggle of investing in the top 500 securities in the U.S. by yourself. Not only will your trading fees by outrageous, but also the paperwork and taxes would be too much to handle for the individual investor. It would be a full time job!
The popularity of mutual funds has risen for good reason. They allow you to get a professional manager for your investments for a very low cost. Another advantage that mutual funds give to investors is the ability to invest in markets that were previously unavailable. For example, without mutual funds international investing would be very complex for an individual investor.
Mutual funds are here to stay. There simplicity has many advantages to the individual investor. If you're looking for more then just a definition mutual funds, read this Mutual Fund Guide. It will answer many questions that beginners have, including where and how to get started.
RJ Weiss is an aspiring Financial Planner. He currently maintains the website Our Financial Planner, a place where young investors can go to learn the fundamentals of mutual funds along with other aspects of personal finance.
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Mutual Funds - Good Choice For New Investors

If you have been thinking about starting an investment portfolio, but feel overwhelmed by the amount of information you would need to make good decisions, there's still hope for you. Mutual funds are a good way for a beginner with very little experience or limited funds to get started with investing in the stock market. Here are some of the advantages inherent in mutual funds.
One big advantage is that they can be a low cost way to manage risk, because there is at least minimal diversification present due to the variety of stocks included in the fund. However, you still may need to purchase shares in more than one fund to thoroughly diversify your investments. Some mutual funds only hold stocks in one industry (for instance, pharmaceuticals or energy). Even though the fund would allow you to diversify across that sector by owning shares in several different companies within it, you would not be truly diversified across the market. In that case, a good strategy might be to invest in another mutual fund that is expressly designed to diversify its holdings across several business sectors.
The reason for doing this, of course, is so that you don't lose all of your money if one sector takes a downward turn. For instance, look at recent occurrences in the residential real estate industry. The downturn in residential mortgage lending affected new home construction as well. So if you owned shares in a mutual fund that was heavily invested in the residential real estate sector, you would be hard hit by the downturn.
If you have limited funds for investing, mutual fund shares can usually be purchased in relatively small dollar amounts, and in even increments. That means you may be able to buy as little as $100 worth of shares. With stocks, you would have to buy in increments of whatever the market price is. That means if the shares were currently trading at $171 per share, you would have to buy them in $171 increments. So if you had $200 available to invest, you could only buy one share.
If you have limited knowledge of the stock market and little or no experience, mutual funds offer the advantage of being professionally managed. That means the manager researches each stock that comprises the fund, so that you don't have to. However, you still need to do your own research of the mutual fund. You also need to research the track record and experience of the fund manager. But that is substantially less research on your part than it would be if you had to research several dozens of stocks.
Author and entrepreneur Bernz Jayma P. is the owner of a financial blog dedicated to helping people expand their knowledge on personal finance. You may visit his blog at http://www.invesmint.com/
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The Best Index Funds

The best index funds are the ones with the lowest expense ratios. An S&P 500 market weighted index fund will always be same no matter where you choose to invest. Therefore, if you're looking for the best place to invest in index funds chose whatever company minimizes costs the most.
The theory why index funds can outperform active investment strategies is that you're minimizing costs and taxes. Therefore, by investing in index funds with high expense ratios you're defeating the purpose of passive investing.
Finding the best index fund families is pretty easy. Time and time again, 3 mutual fund families have provided the best index funds to their customers.
Vanguard - John Bogle, who created the first index found is the founder of Vanguard. Their strategy is simple, lower costs for investors, to provide the highest possible returns. The Vanguard 500 Index fund is the largest index fund in terms of invested money. Their minimum for opening an index fund, is $3,000.
Fidelity - Fidelity is another company that provides their investors with low cost index fund options. They have one of the largest selections of funds available out of any mutual fund company. Their minimum to invest in an index fund are $10,000.
T. Rowe Price - T. Rowe Price is another company that investor's can find low cost index fund. The advantage to investing in T. Rowe Price is their lower minimums. Currently their minimums are only $1,000 to invest in one of their index funds.
The easiest way to invest in these funds is directly with the fund families. That means signing up at their websites, and avoiding all third parties.
Investing with a third party means higher costs. Investing is a game of very small percentages. You need to maximize your chance for success in areas that you're able to. The only direct control you have over your funds is your expenses. All other variables are unpredictable.
Not only to your investments compound, but expenses to do. Even a $100, or a .1% higher expense ratio on an investment of $100,000 is a lost opportunity to invest. If you were to invest $100 for 30 years at a 10% rate of return, you would end up with $18,094 after 30 years! That same scenario with $500, or a .5% higher expense ratio on an investment of $100,000, costs you $90,471 in 30 years!
Index investing has proven to be successful over many years. They allow for great diversification, while keeping costs and taxes at a minimum. The best index funds aren't hard to find, look for the ones with the lowest costs.
RJ Weiss is an aspiring Financial Planner. He currently maintains the website Our Financial Planner, a place where young investors can go to learn the fundamentals of investing and personal finance.
Article Source: http://EzineArticles.com/?expert=RJ_Weiss

Investing in Mutual Funds - What, Who, When, Where, Why & How

What are Mutual Funds?
Mutual funds are professionally managed baskets of securities primarily consisting of stocks, bonds, and money market securities.
What is the Cost of Investing in Mutual Funds?
With the right no-load mutual funds sales charges can be zero, with less than 1% a year deducted from your account for expenses. With the wrong load funds, you might pay 5% or so in sales charges up front, and/or more than 2% a year in expenses.
Who Should Invest in Mutual Funds?
Virtually everyone interested in having a secure, comfortable retirement should give mutual funds serious consideration. These investment packages were designed for the average investor. You fit into this category unless you are extremely rich and financially sophisticated.
When Should I Invest in Mutual Funds?
You should start as soon as you feel you can afford to set money aside for longer-term goals (like retirement). Establish an income and get everyday expenses under control first. Once you have a cash reserve and have taken care of your insurance needs (auto, home, life, disability) you are ready to invest. Investing in mutual funds offer investors of all ages the prospect for higher returns (growth), and/or higher income, and/or competitive interest income with safety.
Where Can I Invest?
Virtually every 401(k) or similar retirement plan offers mutual funds as investment options. You can invest in mutual funds through an investment professional, or you can buy and sell them on your computer through a discount broker. Once you are informed, I suggest you invest directly with a major no-load fund family to avoid sales charges and to keep your yearly expenses low. You can invest in mutual funds in a regular IRA or Roth IRA, and in a taxable account in your name or owned jointly with your spouse.
Why Mutual Funds?
Every investor needs an investment portfolio (list of investments) that is balanced to fit the investor's risk tolerance. At the same time, your investment portfolio should be tailored to fit your needs in regard to various factors. No single investment will accomplish it all for you. In varying degrees, we all need an investment package that addresses: growth (higher returns), safety, income, tax advantages, and so on.
If you want to, you can juggle an armload of various stocks, bonds, money market securities, and alternative investments. This will require more than just a little time, effort, commitment, and expertise on your part if you are to be successful. Or, you can simplify matters and concentrate your efforts on holding just a few well-selected mutual funds.
How Do I Get Started?
Starting out you need to get up to speed on the basics. To get a handle on mutual funds, you'll need to know stocks, bonds, and money markets first. Then you need to get the big picture; and put all of the investments in the world into perspective.
Once you have a handle on the investments available to you, you're ready to learn the art of investing. By maintaining a balanced portfolio, financial success is within your reach. Asset allocation within your balanced portfolio is the real key to achieving you financial goals. Asset allocation means simply where you have your money invested, and in what proportion.
Which funds should I hold in what proportion?
Keep it simple. Start by concentrating on learning all you can about mutual funds. There is a fund to fit virtually every investor need. Once you know funds, you can build your own portfolio of mutual funds.
A retired financial planner, James Leitz has an MBA (finance) and 35 years of investing experience. For 20 years he advised individual investors, working directly with them helping them to reach their financial goals.
Jim is the author of a complete investor guide, Invest Informed, designed for average investors or would-be investors of all levels of financial background and experience. To learn more about investments and investing and his new financial guide go to http://www.investinformed.com/.
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Mutual Fund Disadvantages

If you're new to stock market investing you may have heard that mutual funds would be a good way for you to get started. That's actually good advice, but mutual funds have their own pitfalls to watch out for. Here are some of the things you need to know about the disadvantages of mutual fund investing.
First, many people are under the impression that mutual funds have a lower risk than investing directly in stocks because they are managed by professional fund managers. That's not necessarily true, because the fund's performance will ultimately be determined by the experience and expertise of the fund manager. So if the fund manager is good at her job, the fund will do well. If the fund manager is inexperienced or just lacks talent, the fund could perform poorly.
That means you still need to perform your own due diligence on the fund itself, and on its manager. And you'll still need to monitor the fund's performance over time. It won't be something you can purchase and then ignore, and still expected to prosper.
Next, you will still have to take responsibility for diversifying your portfolio. You can do this by choosing a fund that purchases stocks in a wide variety of sectors, and is widely diversified across the market. Or you can invest in more than one fund if each fund specializes in a particular sector. But you will still have to become knowledgeable about investing in the stock market at some point, in order to make good choices about diversification. Otherwise you run the risk of over-diversifying and canceling out your profit, or under-diversifying and losing the risk-reducing characteristics that mutual funds can provide.
Another disadvantage of mutual funds is the cost of the management fees. Typically, there will be fees assessed each time you buy and sell shares. In addition, there are usually yearly management fees to offset the cost of the built in stock market research and the fund manager's salary.
And there's one more disadvantage that most people don't think about. Mutual funds are usually marketed as being more liquid than owning individual stocks. Generally, it's easier and faster to draw cash out of a mutual fund than it is to trade a stock. But that liquidity comes at a cost to the yield of your investment. In order for the fund to have the liquid cash available for quick and easy withdrawals, the cash cannot be invested in additional stocks (and earning money). So the cash liquidity of the mutual fund comes at the opportunity cost of investing in more stocks.
Despite these drawbacks, mutual funds may be a good investment for you. Just be sure to investigate the issues listed in this article in order to make an informed decision.
Author and entrepreneur Bernz Jayma P. is the owner of a financial blog dedicated to helping people expand their knowledge on personal finance. You may visit his blog at http://www.Invesmint.com
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How to Invest the Easy Way

Learning how to invest requires time and effort. Fortunately, mutual funds have simplified investing for the average investor. In the past few years the process of selecting mutual funds has been made easier. Target retirement funds are now available through major mutual fund families, and are offered by many 401(k) plans as well.
The target retirement fund advantage: one-stop shopping, virtually no investment knowledge or experience necessary. Just buy and hold, pay your fees/expenses and maybe sales charges. Professional money managers handle all of the investment decisions based on the retirement year you pick. Just select the target fund closest to the year of your planned, or past, retirement. Example: target retirement 2030 fund would be appropriate if you plan to retire within two or three years of the year 2030.
Once invested you never need to make another investment decision or worry about how to invest. As you approach retirement and become more conservative, so does your investment portfolio.
Target retirement funds are typically mutual funds that simply invest in other stock funds, bond funds, and money market funds of the same mutual fund company. Target funds dated far into the future, like target 2040 or 2050, will be heavily invested in stock funds for many years to come. If you invest in a target 2020 fund today, your money will be invested primarily in stock funds and bond funds, mostly stock funds the first few years.
If you are already retired and don't know how to invest, you might consider putting your nest egg into the safest of these funds, the retirement income fund. These target funds invest about 80% of your money in safer income-producing investments like bond funds and money market funds to provide you with income in retirement.
It doesn't get much easier. Plus, you can save thousands on mutual fund sales charges by buying one of these funds through a no-load mutual fund family instead of through an investment professional.
Target funds are the easy way to invest in a professionally managed retirement portfolio targeted to your station in life. The idea behind these investments: young people need growth and can accept higher risk, middle-aged investors will accept moderate risk for higher-than-average returns, and older folks will accept some risk to earn a higher level of income in retirement.
The problem is: if you don't understand investment basics or how to invest based on your personal risk tolerance, you might select a target fund that is not really suitable for you. In other words, the same shoe will not fit all investors of a given category. Some young people are conservative, and many retired folks are uncomfortable taking even a small risk with their retirement nest egg.
Like with any other mutual fund, you need to understand the nature of the investments held in a target retirement fund portfolio. Virtually any of these funds can lose money, and in 2008 the vast majority of them did. Why? Because these funds have market risk, and 2008 was a horrible year for the stock market. Let's take a closer look at the risk involved.
If you plan to retire in 2040 and invest in a target retirement 2040 fund, 90% or more of your assets will be invested in stocks. If the stock market drops 40% as it did recently, expect that you will lose almost 40% of your investment value. A 2050 target fund could be 95% invested in stocks.
If you plan to retire in 10 or 20 years, beware that a 2020 target retirement fund will be about 60% invested in stocks and a 2030 fund about 80%. If you are not comfortable with this risk, consider putting all or some of your retirement assets into a safer target fund. For example, a 2010 fund bought today would only be about 25% invested in stock funds.
If you are retired, your obvious choice appears to be the retirement income fund. These funds might invest about 20% in stock funds and the rest in bond funds and money market funds. There is other risk here as well, because long-term and intermediate-term bond funds have interest rate risk. If interest rates in the economy go up significantly, more than likely the value of these funds will fall.
The simplicity of target retirement funds is a nice feature. Just be aware of what you are getting into before you put all your eggs into one basket. Never assume that everything will be just fine. There will always be bumps in the road ahead.
It is always better to be informed so you can deal with difficult times, and avoid major losses. Do yourself a favor and learn how to invest.
A retired financial planner, James Leitz has an MBA (finance) and 35 years of investing experience. For 20 years he advised individual investors, working directly with them helping them to reach their financial goals.
Jim is the author of a complete investor guide, Invest Informed, designed for average investors or would-be investors of all levels of financial background and experience. To learn more about investments and investing and his new financial guide go to http://www.investinformed.com/ .
Article Source: http://EzineArticles.com/?expert=James_Leitz