There are many people that do well by investing their money in mutual funds. However, what are mutual funds and how good are they as an investment?
What are Mutual Funds
A mutual fund is a managed investment fund. This means that there is a fund manager that decides what securities to buy and sell so the fund should have a good return which is split between the investors. There are different types of mutual fund so it is worth learning a bit about them so that you choose the right ones for you. Most mutual funds are open ended funds and they sell shares to the public each day and they must be willing to buy back their funds form investors at the end of the business day. Closed end funds only issue shares to the public once when they are created and sales must take place only when a buyer is found. Unit investment trusts are similar in that they are only issued to the public once when they are created. They tend to have a fixed term and shares can be sold to the fund when required. There is no investment manager as the holding is picked at the beginning and does not change. Exchange traded funds are traded daily on a stock exchange.
Funds will also be classified by the types of investment such as money market, bond, stock or equity and hybrid funds.
Criticisms of Mutual Funds
There are many people that feel that the charges for mutual funds are too high. There are many possible things that they can charge for and those with a fund manager will also charge for their input as well. Of course, a managed account should perform better because there is an expert making sure of it. However, there are unmanaged accounts which have outperformed managed accounts, so this is not a guarantee.
How they Pay Out
How the payments are made and how often can vary between the different companies. However they tend to pay out once or twice a year. They will often offer the option of buying more shares with the money or paying by cheque. Money may also be made when the mutual funds are sold. Tax will have to be paid on the money received. However, as with all investments, there is always the risk that the value will actually go down and so when you cash in the investment you get back less than you pay in.
Balancing the Risk
So basically you will be taking a risk with your money. You will hope that you will be able to get a good return on your money and therefore the risk be worth it, but how can you be sure? It is worth looking at how well the fund has performed in the past and compare it to alternatives. Also always invest money that you can afford to lose, just in case. It could be worth using a financial advisor to help you pick which mutual fund to invest in or do a lot of research yourself so that you can take a calculated risk with your money.