Mutual Funds: Convenient Investing for the Individual Investor

Daniel Penzing
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Investing in mutual funds is convenient, but is it worth the price?

Many experts nowadays recommend investing in mutual funds over buying individual stocks. While this is true, you need to evaluate the costs of mutual fund investing and see how much it benefits your finances.

Expense Ratios

Expense ratios are the costs of maintaining mutual funds. When using mutual funds vs. individual stocks, the expense ratio is what you will have to pay to the managers who run the fund. Typical mutual fund expense ratios are about 2.5% a year or so. This means that for every dollar you invest, the fund management company will take around 2.5 cents.

Typically, you can reduce your risks of investing in a specific company by spreading out your funds over multiple companies. This is income from various companies that is locked in the mutual fund until you withdraw or sell the funds.

Because mutual funds are clustered within a variety of industries, the risks are spread out. Instead of investing in one company, you are investing in a large group of companies. The funds within your account are managed by the fund company, and you can choose the desired risk level – usually ranging from very low to very high. This is similar to investing in stocks, however, the risk level is much less.

Mutual funds also allow you to invest a lump sum of money into a fund. You do not need to buy in over time. Since the fund management company takes care of your investments, the paperwork and investment decisions are much easier.

Who Are Mutual Funds Right For?

Mutual funds are an excellent option for people who are a little nervous about investing on their own for the first time. There are some benefits that mutual funds have to offer that non-mutual fund investments don’t. First of all, mutual funds are a great option for those who want to diversify their portfolios but are unsure how to determine which types of assets to buy. Since mutual funds are actively managed by professionals, investors don’t have to concern themselves with researching a variety of investments. Additionally, since mutual funds are traded on the open market, investors become able to trade them at the same price as any other publicly listed security. They’re also sold in liquid amounts, so the investor doesn’t have to worry about being trapped with too many shares. There are no lockups or forced buys with mutual funds, which can be a great relief for newer investors. For those looking to practice dabbling with the market, mutual fund investing offers an excellent opportunity to do just that without breaking the bank. It is a great way for individual investors to familiarize themselves with the markets and start developing investment strategies based on what they learn from their first few transactions.

Different Types of Mutual Funds

There are many different types of mutual funds, each with its own role in the investment community. Here are some of the most common fund types:

Stocks and Bonds Funds are probably the most common class of mutual funds. They are constructed generally in a similar manner as mutual funds, with a professional manager and investments chosen by a portfolio manager. The difference between stocks and bonds funds and other types of mutual funds is where the investments concentrate. Other types of mutual funds invest in only one type of investment or in a combination of mutual funds and stocks. Stocks and bonds funds will have a certain percentage invested in stocks and another percentage invested in bonds, usually with one representing at least 70% of the investments.

Index Funds are an alternative to the way mutual funds are built. Instead of designating a manager to improve returns by picking stocks, the mutual fund company will attempt to match the performance of a certain index like the Standard and Poor’s 500 or the Dow Jones Industrial Average. These funds attempt to replicate the index by keeping a fixed distribution of shares in every company included in the index. Personal investors can also use the S&P 500 as the index in individual retirement accounts, creating a convenient way to invest in the stock market without doing all of the research.

Class A Mutual Funds

These are the most basic form of mutual funds available. All investors were able to buy class A mutual funds. You could purchase them at any time, and they were available through brokers and also on the Internet. Class A funds were called this because they only charge service fees on the assets they hold in the fund, while class B and C funds also charge fees based on assets from other funds.

The fund is distributed by a sponsor company and has a board of directors. This board will appoint a portfolio manager or administrator to manage the assets in the fund. This individual will actively track the fund and look for areas where it can make money for the investors. Class A mutual funds may have 12 or fewer stocks in the fund.

When you purchase a Class A mutual fund, you invest in this fund, meaning your money is part of a diversified portfolio. Since you don’t know the identity of the stocks you’re investing in, you’re relying on the manager to make the stock picks for the fund. If the fund does well, you’ll make money. If not, there’s a chance you could lose some or all of your investment.

Class B Mutual Funds

An Overview

Mutual funds can be a very convenient investment vehicle for the individual investor. They offer a simple way to participate in the financial markets and have grown in popularity over the past few decades because of their tax-efficiency, and because it is relatively easy to get started with mutual fund investing.

A basic understanding of mutual funds is necessary in order to make an informed decision about whether mutual funds are appropriate for you and which ones will be best suited to your needs.

Mutual funds are an investment pool made up of a group of investors that pool their money together in order to gain access to various securities and raise their buying power. Mutual fund investing is very popular because it allows investors to diversify risk while still being able to participate in major events that occur in the stock market.

A mutual fund is made up of a group of investors. The investors pool their money together in a partnership in order to purchase securities that they otherwise couldn’t afford. This is great for investors because it allows them to diversify their investments without having to worry about buying the right ratios of different securities.

Class C Mutual Funds

Despite the recent hype around other investment vehicles, the mutual fund still remains one of the most common ways to invest in the stock market.

Mutual Funds Are One of the Most Popular Types of Investments because They Offer a Unique Combination Of

Exposure to the stock market and professional portfolio management. Mutual funds are very simple to invest in. You can buy shares directly from the mutual fund company, just like stocks, or you can purchase shares from another investor on an exchange, such as an online broker.

When you buy mutual fund shares, you’re actually buying shares of the entire portfolio. This combines the annual returns of each stock owned by the fund, plus any income generated from interest and dividends. Thus, you get professional management from top-notch fund managers and gain some degree of diversification.

So why do some mutual funds have classifications? This comes from a historical quirk, when mutual funds were actually sold through bank trust departments and fund companies. Class C was the fund sold through the bank.

Class A was offered to individual investors and bought outside the bank. The C meant sales through the bank, while the A meant that you purchased the fund yourself. However, since these days, the funds are bought directly from the fund company, the class distinction is unnecessary.

Class I and Class R Mutual Funds

Not every individual investor enjoys spending the time finding and monitoring investments, and many would prefer to have someone else do that for them. For this reason, mutual funds exist. Mutual funds pool the funds of multiple investors and pool them together for investing. The pooling of money allows mutual funds to invest in a greater range of investments than an individual investor would be able to. Mutual funds can invest in a variety of securities depending on the investment objective.

Mutual funds offer a number of potential benefits to investors:

  • Diversification: Mutual funds offer a way to invest in a wide variety of different assets. Mutual funds can invest in foreign securities, bonds, stocks, commodities, and more.
  • Professional Management: Investors can choose to have their funds professionally managed. Investment funds do not generally have a single manager, but rather they often have a team of portfolio managers who all have expertise in different areas.
  • Professional Management: Investors can choose to have their funds professionally managed. Investment funds do not generally have a single manager, but rather they often have a team of portfolio managers who all have expertise in different areas.
  • Liquidity: Mutual funds typically allow investors to access their money on a daily basis. This provides liquidity in a world where most other investments are far less liquid.

Mutual Funds: Common Fees and Expenses

Mutual funds are fundamentally pools of money that are used to purchase a wide variety of assets, ranging from stocks and bonds to commodities and real estate. You can purchase and redeem shares of most mutual funds directly from the fund company rather than from a market maker or other broker. There are many reasons to invest in mutual funds, but the most important reason is the fact that you can diversify without the difficulty, expense, or complexity of first purchasing individual securities … or attempting to do so. That’s in part because funds can purchase large amounts of securities that you, as an individual, likely couldn’t.

If you’re interested in learning more about mutual funds or getting started with your own investment account, consider the following information:

Mutual funds provide significant diversification.

Many mutual funds offer excellent performance at relatively low cost.

Funds provide liquidity.

Whether your funds are held in taxable or tax-deferred accounts, you should be aware of the fees and expenses charged by your funds.

The following information is a short overview of the fees and expenses that investors face in connection with various types of mutual funds. While the fees and expenses associated with individual mutual funds can vary significantly, the following information should give you a basic idea of the kinds of expenses that you may be paying.

Portfolio Value From Investing $100,000 Over 20 Years

  • How Do the Markets Perform? – A chart of the investments returns versus the S&P 500 returns
  • The Value of Diversification – A chart shows what happens to a portfolio when it's diversified vs. when it's invested in just one stock or sector.
  • The Dollar Cost Averaging – A chart showing how investing in the same mutual fund over time can be better than investing in a lump of cash
  • Investing vs. Buying Treasury Bills – A chart showing a historical comparison of the yearly returns on investment and treasuries.
  • Making Your First Mutual Fund Investment – A chart explaining the process of making an investment in a mutual fund.
  • What Happens to My Money if the Stock Market Crashes? – A chart showing how mutual funds protect you as compared to direct investment.
  • How to Pick a Mutual Fund – A chart explaining the different categories of mutual funds and how their returns are generated.
  • Things to Consider When Choosing a Mutual Fund – A checklist to help you make the best choice for long-term growth.
  • Mutual Fund Returns vs. Treasury Bills – A chart shows the number of mutual funds that beat treasuries in the past 25 years.

Be Aware of Investment Fees

When you are evaluating funds for an investment account, you should pay attention to the total cost. This includes the fee charged by the fund company (often called the 12B-l fee) as well as any sales commissions that are incurred when the fund is purchased. When you are calculating the total cost of a fund, you should properly incorporate these fees.