Mutual Fund Basics Tutorial

Even if you don’t really understand stocks and bonds and the markets they trade in, you and other beginners can make money investing in mutual funds once you get a handle on the mutual funds universe. Here we take the mystery out of investing for beginners.

As you probably know, mutual funds have become extremely popular over the last 20 years. What was once just another obscure financial instrument is now a part of our daily lives. More than 80 million people, or one half of the households in America, invest in mutual funds. That means that, in the United States alone, trillions of dollars are invested in mutual funds. (For more reading, see A Brief History Of The Mutual Fund.)

In fact, to many people, investing means buying mutual funds. After all, it’s common knowledge that investing in mutual funds is (or at least should be) better than simply letting your cash waste away in a savings account, but, for most people, that’s where the understanding of funds ends. It doesn’t help that mutual fund salespeople speak a strange language that is interspersed with jargon that many investors don’t understand.

Originally, mutual funds were heralded as a way for the little guy to get a piece of the market. Instead of spending all your free time buried in the financial pages of the Wall Street Journal, all you had to do was buy a mutual fund and you’d be set on your way to financial freedom. As you might have guessed, it’s not that easy. Mutual funds are an excellent idea in theory, but, in reality, they haven’t always delivered. Not all mutual funds are created equal, and investing in mutuals isn’t as easy as throwing your money at the first salesperson who solicits your business. (Learn about the pros and cons in Mutual Funds Are Awesome – Except When They’re Not.)

In this tutorial, we’ll explain the basics of mutual funds and hopefully clear up some of the myths around them. You can then decide whether or not they are right for you.

 

The Definition
A mutual fund is nothing more than a collection of stocks and/or bonds. You can think of a mutual fund as a company that brings together a group of people and invests their money in stocks, bonds, and other securities. Each investor owns shares, which represent a portion of the holdings of the fund.

You can make money from a mutual fund in three ways:
1) Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly all of the income it receives over the year to fund owners in the form of a distribution.
2) If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also pass on these gains to investors in a distribution.
3) If fund holdings increase in price but are not sold by the fund manager, the fund’s shares increase in price. You can then sell your mutual fund shares for a profit.

Funds will also usually give you a choice either to receive a check for distributions or to reinvest the earnings and get more shares.

Advantages of Mutual Funds
• Professional Management – The primary advantage of funds is the professional management of your money. Investors purchase funds because they do not have the time or the expertise to manage their own portfolios. A mutual fund is a relatively inexpensive way for a small investor to
Read more: http://www.investopedia.com/university/mutualfunds/

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