A mutual fund collects money from various individuals and invests it in bonds, stocks, and other securities. The mutual fund advisor manages the fund on a regular basis so the investors do not need to worry about this aspect. Investors find mutual funds attractive because they provide ownership of a wide collection of bonds and stocks with less investment than is required when purchasing these items individually.
The stocks, securities, and bonds held by a fund are called the portfolio. Each investor owns a quantity of shares representing a portion of the portfolio’s total holdings. Investment companies often provide a variety of funds from which investors can choose, each with different levels of risk and investment strategies. Investors can purchase mutual funds directly from an investment company or through financial planners, brokers, insurance agents, or banks.
Prior to selecting a mutual fund, an individual should learn about the different funds available. There are both short and long term investment choices so it is important to consider the desired investment perspective and timeline. There are different categories like precious metals, minerals, natural gas, utilities, and oil, so the investor will need to determine in which industries there is interest.
The prospectus for the fund provides a lot of this information and also details the fund’s performance and other financial information. The fee table for the fund should also be examined so the investor has an understanding of the various charges to fund participants. In addition, the investor should request the annual report for the fund if it is not included in the prospectus. This document provides valuable information like market indices and any strategies or events that affected the performance or investment direction of the fund.
Investors should consider the objective and holdings of the fund in relation to the other investments in the portfolio. Mutual funds are characterized by low risk and an ability to spread the volatility of any one stock because they offer diverse holdings in and of themselves. However, they are not 100 percent safe investments so they should be examined in light of the remainder of the investment portfolio.
Check out my gold mutual funds article.