By pooling the money of many investors with similar financial goals, a mutual fund can do for you what you can’t do easily on your own: Buy and sell securities with the benefit of professional research and management and relatively low trading costs. Mutual funds make it possible to own a piece of hundreds of different securities with a relatively small investment. And it’s easy to get your money back in an emergency—or if you change your mind. An open-end mutual fund will buy back or redeem your shares at any time. Shares of closed-end funds trade on exchanges like individual stocks.
Different fund types
There are dozens of different types of mutual funds. Some funds are defined by the markets they invest in—U.S. stocks, international stocks, emerging market stocks, high yield bonds, for example. Others reveal something about their investment style in their name, such as dividend achievers, growth, value or small cap. According to the Investment Company Institute, there are approximately 8,000 mutual funds available to U.S. investors.
How mutual funds work
When you invest in a mutual fund, you purchase shares, based on a current net asset value (NAV), plus any sales charge. A sales charge is used to help compensate your financial professional for working with you to develop a strategy and choose funds that can help you achieve your personal goals.
A mutual fund can make money through capital appreciation, income or both. 1) Capital appreciation: When the securities in the fund increase in value, the fund’s share price increases. 2) Income: When a fund receives dividends or income, it is distributed to shareholders. Of course, your shares may also decrease in value.
How do you know how much your fund shares are worth? Funds are required to recalculate their NAV every business day. As a result, a fund’s value fluctuates. Investors can track a fund’s share price in the financial pages of major newspapers, online and over the phone by calling the fund family.
Risks
Mutual funds are exposed to the risks associated with the specific markets they invest in and the investment strategies they follow. For example, a mutual fund that invests in the U.S. stock market is exposed to economic news, corporate profit reports and changing interest rates. An international stock fund is also exposed to currency risk and political uncertainty.
Keep in mind that most mutual funds are intended as long-term investments, and investment risk tends to decline over the long term.