In the new millennium, mutual funds have grown at a pace which will make the industry a stronger one to deal with in the near future. The industry has helped in maintaining investor confidence despite the prolonged crisis, say, in Asia. It has minimized capital flight and has brought new perspectives in terms of the investment and savings maturity, even in third-world countries. Given the need for these countries to compete in the global market, mutual funds will certainly serve as a vital ingredient for their current and future development.
What is a mutual fund? How does one invest in it? When you invest in a mutual fund, your money is combined with the money of many other investors. Professional fund managers use this pool of money to create a portfolio of investments, which may include:
– Stocks: ownership of shares in publicly held companies;
– Bonds: interest-bearing certificates issued by governments and corporations; and
– Money Market Securities: short-term instruments, such as Treasury bills and certificates of deposit, that mature in less than one year.
Each mutual fund has specific investment goals that can range from long-term growth to current income. In addition, a fund may be invested in specific types of investments to achieve its goals, such as dividend-paying stocks, international investments, or long-term bonds. Owning shares of a mutual fund is similar in some ways to owning shares of stock in an individual company. The mutual fund company will ask you to vote for its board of directors and to help determine other company matters. The mutual fund also may pay you dividends from the securities in which it invests, or capital gains that the fund made from selling securities.
According to mutual fund investors, the three most important benefits of mutual fund investing are:
1) Professional management – You can rely on the expertise of professional portfolio managers to select investments for the fund. This can be especially valuable during times of volatile prices and uncertain market direction.
2) Investment diversification – A mutual fund allows you to spread your money among many different securities. Whether you invest in one mutual fund or several, keep in mind that your investments should include a mix of stocks, bonds, and money market securities to lower your overall investment risk.
3) Convenience – It is easy to buy and sell mutual fund shares, exchange shares between funds, and reinvest your distributions of dividends and capital gains.
When selecting or evaluating a mutual fund, look at the fund’s performance over the long term. Consider periods such as one year, five years, and ten years. Keep in mind that past performance is no guarantee of future results. And there are important factors to consider in addition to a fund’s performance. For example:
– your risk tolerance and investment time horizon;
– the fund’s objectives and investment style;
– the tenure of the fund’s manager(s);
– the stability of the fund company;
– the fund’s compatibility with your investment goals; and
– the fees associated with investing in the fund.
Analyzing these factors and long-term performance can provide you with a complete picture. Be sure to read the prospectus carefully before investing or sending money. A mutual fund’s prospectus includes details of its objectives, investments, fees, and other pertinent information.