Lets start off with what a mutual fund really is. A mutual fund is an association or organization that invests in an abundance of different equities. This could include bonds, stocks, options, commodities, etc. When buying a mutual fund, you are investing in the securities that the mutual fund plans to invest in. For example, a fund might allocate money in the following ratio: 80% Technology, 10% Medical, and 10% Natural Resources.
There are many different types of stock funds. Growth funds are funds that buy stock in companies the fund believes to have an immense opportunity for growth. Sector funds, are funds that invest in the broad sectors of the markets, and index funds invest in indexes such as the Nasdaq, S&P 500, and the Dow Jones. In the current economic condition, index funds have been triumphant as the U.S. markets are reaching 52-week and all-time highs. These are just a few of the different types of mutual funds on the market.
Many investors compare mutual funds to common stock. This is a false comparison. Unlike mutual funds, the share price of a stock is dependent on investors' emotions and swaying of the markets. Mutual funds are priced at the net asset value (NAV) of the fund. To find how much a share of a mutual fund is worth, you divide the value of the cash and securities in a funds portfolio, less all liabilities, by the total number of outstanding shares. Then by dividing the NAV value by the outstanding unit, you are left with the price per unit. So a mutual fund is priced at how its investments are doing and the existent position in the portfolio.
Fund managers collect and gather assets in the form of stock purchased by the investors. Then the funds are divided into specific sectors within the market. Each mutual fund has a mission its follows. Some funds might only invest in the technology sector through ten specific stocks, while other funds invest in several sectors in numerous stocks. It all depends on the mutual fund that you invest in.
Mutual funds virtually move most of their liquidity back to the investors and share holders. They have to make money somehow, and they do this by charging fees back to the investors. Fees can be charged three ways: front load, where all fees and expenses are payed off immediately; back load, when fees are payed when selling the mutual funds stock; and no load, where expenses are payed off periodically throughout the time period you contain the stock. These expenses are usually charged by a percentage, according to the amount of money you have invested in the specific mutual fund.
Someone who has minimal capital to invest can benefit by investing in one mutual fund and diversifying his portfolio into various stocks and securities.
Instead of investing in ten different stocks individually, you can purchase one share of a mutual fund. Funds depict diversification towards all sectors in the stock market.
When looking into purchasing a mutual fund, there are many different types of risks and rewards that are necessary to observe. When analyzing risk, there are five main indicators that could help you. These include Alpha, Beta, R-Squared, Standard Deviation, and Sharp Ratio. Alpha is used by taking the volatility of a mutual fund and comparing it to the performance of the mutual fund. Beta is described as also measuring volatility but instead of comparing this number to the mutual fund, it is compared to the whole market. R-Squared represents how statistical percentages of a funds assets are explained and compared to the funds benchmark index. Standard Deviation can be explained by using the rate of return and compared it to the measure of volatility. The last and final way of deciding a mutual funds risk is through Sharp Ratio. This is figured by subtracting the risk-free rate of return from the rate of the investment, then dividing it by the total standard deviation of the investments return.
Realistically, when looking at a mutual fund, you personally want to weigh the risk and reward of what the fund plans to pursue. For the most part, investors can take an extensive look into the investments that the mutual funds plan to make and then make decisions. Look into each investment and decide whether the fund would be beneficial to your portfolio. Would you rather invest in a risky or conservative mutual fund?
There are many well-known, successful mutual funds available. These include Pimco Total Return (PTTAX) with assets towering toward $265 billion and Vangaurd Total Stock Market Index Fund (VTSMX) reaching around $190 billion in assets. Never before in our history has the mutual fund business been going so strong.
--Written by Max Levin for MainStreet
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