A mutual fund is a pool of money managed by a professional (or a group of professionals) called an “investment adviser.” In a managed mutual fund, after investigating the prospects of many companies, the fund’s investment adviser will pick the stocks or bonds of companies and put them into a fund. Investors can buy shares of the fund, and their shares rise or fall in value as the values of the stocks and bonds in the fund rise and fall. Investors may typically pay a fee when they buy or sell their shares in the fund, and those fees in part pay the salaries and expenses of the professionals who manage the fund.
A primary advantage of mutual funds versus individual stocks or bonds is the inherent diversification obtained through mutual fund investing. One caveat, however, is that simply purchasing one mutual fund might not give you adequate diversification. It is important to evaluate if the fund is “sector or industry specific. For example, investing in an oil and energy mutual fund might spread your money over fifty companies, but if energy prices fall, your portfolio will likely suffer.
Another advantage to investing in mutual funds is that you are able to take advantage of their buying and selling size and thereby reduce transaction costs. When you buy a mutual fund, you are able to diversify without the numerous commission charges. Yet another advantage of investing in mutual funds is the ability to get in and out with relative ease. In general, you are able to sell your mutual funds in a short period of time without there being much difference between the sale price and the most current market value. However, it is important to watch out for any fees associated with selling, including back-end load fees or sales commissions.
Before investing in mutual funds, it is very important that you carefully read the prospectus on the fund. The prospectus will detail the nature of the investments held within the fund, the fees you will pay as well as the risks of investing in the fund. For more information on investing in mutual funds, please contact your Ocean Financial Services investment professional.