Why Invest in a Mutual Fund?

A mutual fund is another way to invest your money on the stock market. It is a good
way to diversify your stocks but it still carries risk, as with any other type of
investment. This fund is often called an ‘open-ended’ fund and is made up of a variety of stock options including bonds.

Mutual funds were first used in the 1920s and can best be regarded as a portfolio of investments where a number of investors pool their money to buy a share in these investments. Mutual funds are managed by an investment company or fund manager. Companies choose to become a part of a mutual fund when they want to use their profits to invest in other businesses.

The number of shares in a mutual fund is not pre-determined. More shares can be
realized when needed, members of a mutual fund can sell back their shares and the
fund sells its own new shares.

Mutual funds fall in to three categories

• Income Funds
• Growth Funds
• Balanced Funds

These categories are the same as normal stocks, in that people will invest in them for the same reasons they invest in say, growth stocks. It is interesting to note that mutual funds outnumber individual stocks on the stock market.

So mutual funds will help you diversify your investment portfolio, but they do carry added fees and costs, not seen in singular stocks. When you buy shares in a mutual fund you will be not only paying the share price’s net asset value (NAV) but you can add on the shareholders fees, annual fees and sales costs. It doesn’t matter how your mutual fund performs, you will still have to pay the fees. And don’t forget any tax on capital gains you may have to account for.

There are other negatives you may wish to take into account before you invest in a mutual fund. For instance, you have no control over the make-up of your fund. You can’t pick and choose which stocks you want or direct the fund manager when to trade. You also don’t have access to ‘real-time’ stock prices. Because the prices of stocks in a mutual fund are determined by the NAV, calculation of their value is usually only made once a day, after the market has closed.

So there are some negatives in investing in mutual funds, but you may decide that the positives outweigh them. So let’s look at the advantages of investing in a mutual fund. Mutual funds are professional managed. They provide you with an instant diversification in your portfolio. If you don’t have much money to start investing with, you can find a mutual fund to accommodate your finances. And if you invest in mutual funds, you can easily cash in your shares at their NAV whenever you wish.
Earning money through mutual funds occurs in three ways:

• Payment through dividends, less expenses.
• Capital Gains, which are distributed at year end.
• Increase in the NAV. If this has risen from when you bought your shares in the
  mutual fund, then you will make money when you sell.

You can elect to receive any money you earn through the mutual fund or you can reinvest it in the fund, it’s all up to you. Remember you still will have risks associated with your mutual fund and there are going to be extra fees involved, but if you are keen to diversify find out all you can about the mutual fund you are interested in.

Remember to read the prospectus and associated charts, investigate all the fees that will be involved and if you think the mutual fund can offer you a good investment, give it a try.