subject: Have You Heard About Investing In Mutual Funds [print this page] Whether you're a first-time mutual fund investor or a seasoned veteran, you should understand what differentiates single stock investments from mutual fund investing. Picture a collection of stocks, bonds, or other securities that are purchased by a group of investors and then managed by an investment company. That's a mutual fund.
When you buy into a mutual fund, investment professionals manage your money. They carefully research, select, and supervise all the assets in the mutual fund. This frees you from having to select and track individual investments. When you invest in mutual funds, you get access to some of the finest investment minds on Wall Street.
Often, mutual funds belong to a "mutual fund family." You may be able to shift your investment among different types of mutual funds, often with no more than a phone call. That way your portfolio can easily be tailored to suit your financial situation and your expectations about the market. However, transfers among a fund family are considered sales, which may result in paying capital gains taxes if the fund being sold has appreciated.
Mutual funds make managing your portfolio very easy. Periodic statements will fill you in on the performance of your mutual fund, transactions within your account, and more. You'll also be kept informed about the taxability of your distributions.
When one security in a fund drops, an insightful fund manager may have included stocks that could cushion or offset that loss. Diversification is a big selling factor for mutual funds; there is, in fact, relative safety in numbers. But that's not to say that an investor couldn't diversify via his own stock selections. Remember that diversification cannot eliminate or guarantee against the risk of investment loss; it is a method used to help manage investment risk.
Fund investors can cash in on any business day. When you sell a stock, you must wait three business days before the trade settles and your money is released. Mutual fund investors often cite transaction ease as an inviting factor. And it is hard to beat the convenience of having records and transactions handled for you, while periodically receiving a detailed statement of your holdings.
Transacting business with stocks can be a more complicated experience. Placing buy orders, selling shares, or dictating any number of orders can be time-consuming. To some, however, that's just part of the experience. In summary, fund investors are often attracted by the overall convenience. By way of contrast, stock investors may tend to be more comfortable with their own investing skills.
Index funds are mutual funds that attempt to match the performance of any of several market indexes. For example, a stock index fund may hold stocks that mirror the S&P 500 or the Dow Jones Industrial Average. Index funds provide a broad diversification within a single type of asset class. The performance of an unmanaged index is not indicative of the performance of any specific security. Individuals cannot invest directly in any index.
by: Arthur McCain
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