Mutual Funds

Mutual Fund Nitty Gritty

March 11th, 2008 Subscribe To Our Feed

Listen. Many individual investors put their money together with a professional manager who invests that money in securities, such as short-term money market instruments, bond, and/or stocks. The manager is also called the portfolio manger and trades the fund’s securities hoping to make a profit. A profit is a capital gain and is taxable. A capital loss may occur as well. Some of the stocks may pay interest income or dividends. By investing in many different kinds of securities, the theory is that there is less risk involved. You’ve probably heard the expression “Don’t put all your eggs in one basket”.

The first mutual fund was invented in 1924 by the Massachusetts investors Trust (now MFS Investment Management) and after a year in business had 200 investors or shareholders and $392,000 in assets. The mutual fund industry has grown to ten of millions of dollars today.

Diversification

Among share mutual funds, there is a great deal of diversity in various funds:

International mutual funds contain shares of companies that trade on the foreign markets
Domestic mutual funds contain shares of companies that trade only in the United States
Small cap funds contain shares of companies with capitalization under a certain dollar amount
Large cap funds contain shares of companies with capitalization over a certain dollar amount
Sector funds contain shares of companies in a certain line of business

For example, some investors prefer investing in mutual funds in the health care industry, with a portfolio of shares in pharmaceutical and managed care companies. The hottest trend in sector funds is green funds: mutual fund portfolios based on companies that are involved in the environmental industry. These funds include shares of companies operating in the fields of wind power, solar power, hybrid vehicle development, geothermal energy harvesting, earth-friendly construction materials, recycling and waste management.

A Variety of Investment Vehicles

What follows is a list of just a few of the different blends of individual investments that you will find in mutual funds. The makeup of mutual funds varies because each fund manager is a unique individual:

Bond Funds
Share Funds
Mixed Funds

Bond funds – the mutual fund contains bonds only. Experts in mutual fund investing generally advise that bonds are lower risk than other kinds of mutual funds.

Share Funds – the mutual fund contains shares of stock in publicly traded companies only. The risk is much higher than mutual fund investing in bond funds, but the rewards can be much greater in the form of high profits.

Mixed Funds – most investors prefer investing in mutual funds that contain a blend of bonds and shares of stocks.

Mutual funds with the highest volatility (large increases in the price of the stock) tend to have the highest risk while bond funds have the lowest risk.

Building A Successful Portfolio

Investing is a lot like building a house. If you use good materials and put in a solid foundation of the fundamentals, the fund will increase in value, just like a finely crafted house. If it invests in dubious securities, the fund will fall in value so it’s important to pick a fund with a winning portfolios manager that has a good track record.

Tracking Performance

All mutual funds track their performance so the investors can measure how well the mutual fund is handling their investments when compared to the plethoras of available mutual funds. If the mutual fund does not grow, then the portfolio manager probably used poor judgment in stock selection. A good manager will recognize his mistakes and take action to select better securities.