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A good way to diversify your stock investments is with a mutual fund. A mutual fund is another way to invest your money on the stock market by combining your money with that of other investors to buy shares in the fund.
A mutual fund is made up of a variety of stock instruments and can include bonds and sometimes US Treasury 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 predetermined. 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.
Just like common stocks, mutual funds fall into three categories – income, growth and balanced funds. It is interesting to note that mutual funds outnumber individual stocks on the stock market.
Mutual funds will help you diversify your investment portfolio, but they do carry added fees and costs, not seen in individual 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. Each year you will be sent a 1099 indicating any capital gains you may have received.
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.
What are the advantages of investing in a mutual fund?
Mutual funds are professionally managed. They provide you with an instant diversification in your portfolio. You can find a mutual fund to accommodate your investment at any level. 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:
1. Payment through dividends, less expenses
2. Capital Gains, which are distributed at year end
3. 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 re-invest it in the fund – it’s up to you.
Every mutual fund must have a prospectus. The prospectus has all the information about what stocks or other instruments the fund is invested in along with past earnings figures.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.
Remember there are risks in any investments and with mutual funds you will have extra fees to consider but if you are eager to diversify, find out all you can about the mutual fund you are interested in.
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