Mutual funds are sold by companies that pool money (capital) from many investors. This capital is then invested in bonds, stocks and/or other securities. Investors in the fund all have shares, and these shares represent a part of the fund’s holdings.
If you’re interested in making an investment, a mutual fund may or may not be the right choice for you. Like all investments, they come with many different levels of risk. They aren’t insured or guaranteed by financial institutions or government agencies, even those sold by banks. However, because mutual funds are often a mix of various bonds and/or stocks, the risk in some mutual funds is “spread out" or diversified. That said, some mutual funds are not diversified, and it is important to understand that a mutual fund investment can be very high risk, or very low risk, depending upon the holdings and the goals of the fund. Each fund must be looked at individually to determine if it is appropriate for the investor, in the same manner as any individual stock or other investment.
Mutual funds are managed by professional fund managers. These managers invest the money investors contribute into individual stocks, bonds and other securities. And because mutual funds buy and sell securities in large amounts at one time, they usually incur fewer fees, thus operating in a cost-efficient manner. However, it is very important to carefully examine prior to purchase all of the fees and costs associated with the fund you are purchasing as they vary greatly and take a significant bite out of your return.
Ordinarily, mutual funds are long-term investments. And ordinarily, brokers who switch shares among funds with comparable investment goals have committed a violation if the switch serves little or no legitimate financial purpose other than earning the financial advisor a fee. Such switching not only increases the fees investors pay, but it also puts them at risk of increased tax liability.
Often, investors are unaware that their broker has increased their investment costs and risks by “switching" their mutual funds. Mutual funds are intended to be held for a substantial length of time, not traded like individual stocks. To do so results in considerable charges that do not apply to common stocks. Furthermore, the majority of mutual funds, by their very nature, may already be diversified and do not need to be traded unless there’s been a major change in the allocation of their assets or the fund manager’s market focus is narrow to the extent that it increases investor risk.
Mutual fund switch transactions are a violation of FINRA acceptable sales practices. If you believe you may have experienced financial loss due broker switching, contact an investment recovery lawyer. Your broker’s misconduct may constitute a viable claim on your part for damages.
Questions and Answers:
How do you buy mutual funds?
To purchases shares (portions) in a mutual fund, investors may go through stockbrokers, banks, insurance agents and other investment professionals. They can even buy portions from the fund directly.
When you buy shares, you pay the current net asset value (NAV) for each share. You also pay any sales charge (sales load).
Are mutual funds easy to sell?
Yes, any mutual fund will buy back your shares during regular business hours. Within seven days, you’ll receive the NAV for each share sold minus any sales load.
Are mutual funds a risk-free investment?
No. Just as individual stocks fluctuate in value, so does the portion price of mutual funds. Therefore, the value of your investment will sometimes be more, sometimes less than its original price.
How do you choose the mutual fund that’s right for you?
To determine if you should invest in a mutual fund, acquaint yourself with the major types that are available.
Mutual funds may be categorized by their asset types. Most are either bond funds, stock (equity) funds or money market funds. However, numerous variations exist within these three categories. In fact, some mutual funds combine several types of investments. An asset allocation fund, for instance, is a type of mutual fund that combines all three asset classes—funds, stocks and money markets. Some mutual funds, funds of funds, invest in other mutual funds rather than in individual securities.
Mutual funds may also be categorized according to the investment strategy that they follow. Funds that attempt to reduce tax liability, for example, are called tax-efficient funds. Some mutual funds are managed actively while others try to imitate an index.
Every mutual fund has its own rewards and risks. In general, the greater the potential return, the greater the risk of loss.
When you’re looking for a mutual fund, be sure to shop around, comparing mutual funds of the same type with each other. If you find a mutual fund that interests you, carefully examine its prospectus. Think about the goals, risks, and expenses involved in investing. Is the mutual fund’s aim in keeping with your own? Are the risks acceptable to you?