April 28, 2014
Whether you have been investing for decades, funding your child's 529 plan, or contributing to your 401K, chances are you have heard of mutual funds. Anyone can throw industry jargon at you, but my goal is to educate the folks I work with and to help them understand what they're investing in, and why.
Let's pull back the veneer and uncover what a mutual fund is and how it works. The U.S. Security and Exchange Commission (SEC) defines a mutual fund as a company that brings together money from many people and invests it in stocks, bonds, and other assets. In its simplest form, a mutual fund is a collection of stocks, bonds, or materials. Investors may purchase shares of a mutual fund which represent a portion of the fund's assets. Most mutual funds will have a professional manager deciding which investments to own.
An investor can make money from a mutual fund in three ways:
- If the value of the fund's holdings grow, the fund's shares will increase in price. The investor can then sell the fund to earn a profit.
- If the fund manager sells securities for a profit, there is a capital gain. Most funds pass capital gains along to the shareholders through a special distribution.
- Income may be earned from stock dividends and interest on bonds. A fund may pay the income to the shareholders or reinvest the proceeds to purchase more shares of the fund.
By owning shares of a mutual fund, you can spread out your risk among a number of investments. However, despite the ability to spread out your risk, mutual funds are similar to other investments, meaning, their values will fluctuate. It is important to own mutual funds that are in line with your investment objectives and your risk tolerance.
If you have any investments that you would like further clarification on or any additional questions on the functionality of mutual funds, I am more than happy to help.
Ethan Wade, Financial Advisor
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).