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What is a Mutual Fund?Benefits of mutual funds for the beginning investor include: Diversification Professional management Oftern low-cost shares Liquidity (shares can be bought or sold easily) More than 8,000 different mutual funds are available on the open market. The investor should learn the objective of the fund, what securities the fund owns, the level of risk, and its earnings record as compared with similar funds. Each mutual fund has an objectinve that determines the types of securities in which it invest. The fund objectives are stated clearly in the prospectus, which is the legal document describing the fund. For example, the fund objective may be "growth and income." This growth and income fund might own common stock of emerging companies and common and preferred stocks and bonds of large, well-known "blue-chip" companies. The prospectus is available online or by mail from the investment company that manages your mutual fund. Most mutual funds require a minimum initial investment, sometimes as low as $250, but often quite a bit higher. Mutual fund shares trade very much like stocks, rising and falling in price depending on investor interest and the performance of stocks in the fund. The Net Asset Value(NAV) of a mutual fund indicates its value or price per share. Like stocks, mutual funds ar liquid, which means they can be easily bought and sold. The two most common types of mutual funds are equity funds that invest primarily in common stocks and fixed-income funds or bond funds that typically invest in bonds or money market securities. Investors can find a hybrid in balanced funds that invest in both equities and bonds. Before investing in a mutual fund, you need to find out if it's a load or no-load mutual fund. Load funds charge a sales commission; no-load funds don't. When a sales commission is paid going into a mutual fund, that's called a front-end-load. A commission paid when you sell is known as a back-end load. In theory, the advantage to "paying a load" for a fund is that there are usually staff members available to explain the fund to potential investors and advise them as to the appropriate time to buy more shares, or to sell. With some no-load funds, an employee merely takes your order to buy or sell, or can only offer limited support- the investor is fully responsible for understanding the investment. Even a no-load fund may still charge a "12(b)-1 fee" to cover the sales and marketing expenses involved in operating the fund. One of the best resources for anyone who wants to learn more about investing in mutual funds is available at
One key wealth-building strategy for mutual fund investors is "dollar cost averaging"- the technique of investing the same fixed dollar amount in an investment, such as a mutual fund, at regular intervals over a long period of time. The advantage of dollar cost averaging is that the average price per share will be lower because the cost is spread out over time, providing insulation against changes in market price When employees purchase shares of their employer's stock through regular payroll deductions, they are dollar cost averaging. Dollar cost averaging helps avoid the problem of buying high and selling low. Investors can make money if they sell the investment at a price higher than the average purchase price over the time that they invested. This can help limit losses during times of declining prices and accelerate profits during times of rising prices.
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