Mutual Funds

Description

A Mutual Fund is a collective investment run by a financial management company. Money from many individuals is pooled to construct a portfolio which consists of a mixture of stocks, bonds, real estate, and other securities. The price for a mutual fund share is equal to the NAV (Net Asset Value) of the fund divided by the number of shares issued.

Each mutual fund has its own charter, which specifies the category of shares in which the fund will specialize. There are many different categories to choose from:

Growth funds - concentrate on the shares of high-growth companies.

Income funds - invest in high dividend shares.

Sector funds - these buy shares of companies which operate in a particular sector, an example would be a technology fund.

Overseas funds - specialise in the shares of companies operating abroad, an example would be an Eastern Europe fund.

Index funds - track a certain index, such as the S&P 500.

Bond funds - invest in bonds, examples would be government bond funds, municipal bond funds and corporate bond funds.

As a divesified investment, a mutual fund is inherently less risky than a single stock, and so is unlikely to lose nearly all its value in a very short period of time. But a mutual fund in a volatile sector , though perhaps not as high risk as individual companies within the sector, does carry the overall risk of the sector.

The managing company will charge an annual management charge, normally a % of the total asssets of the fund. If it's an actively managed fund, charges are high, and can take quite a bite out of your investment. Index funds generally have much lower charges.

Other charges such as front-end and back-end loads can be avoided altogether by choosing a no-load fund.