Debt Free

Well, what are mutual funds? Mutual funds are simply a fund you can buy shares of that's itself made up of shares in many different individual stocks, bonds or other financial instruments. The point of a mutual fund is to diversify your investment holdings to reduce risk and increase return. You purchase shares of mutual funds through brokers from the fund. It's similar to buying individual stocks or bonds, but shares of mutual funds are not directly traded on a stock or commodities exchange. The exception to this rule are funds called exchange traded funds, or ETFs.

Mutual funds are available from most of the major investment houses, such as Fidelity, Janus, Vanguard, T. Rowe Price, and many others. Typically, mutual funds are managed by a fund manager, whose responsibility it is to insure that the fund's return to investors is as high as possible. Ostensibly an investment professional with years of experience, backed by a team of researchers, and powerful software would be able to do this with no problems.

However, the dirty little secret of the mutual fund world is that many mutual funds do not outperform the market as whole over the long term, which is how most funds are used. Active investors who trade stocks on a regular basis tend to prefer individual equities. They may still hold mutual fund shares, but most of these will be used as buy and hold type of investments.

There are several broad classifications of mutual funds, which roughly describe the types of companies they invest in. Which funds you choose to invest in, if any, will be determined by your investment objectives. If you're investing for retirement that's a long way off, you'll pick different funds than if you are investing with an eye to receive regular income from your investments.

Sector funds concentrate their investments in a single industry or a group of tightly related ones.

Growth funds invest in companies who are, in the opinion of the fund's management, likely to experience rapid growth.

Index funds track market indices, such as the S&P 500, Dow Jones, Wilshire 5000, or NASDAQ composite index. These tend to not be actively managed, so in theory these funds have lower expenses than other classes of funds.

Balanced funds - A fund composed of a mix of equities (stocks) and debt (bonds). In theory stocks and bonds tend to cycle roughly inversely to each other, so a balanced fund can help diversify risk.

Income funds – Income funds are targeted at maximizing dividend income within the fund's objectives. These types of funds tend to have a lower volatility (smaller price swings) than growth funds.

Emerging Market funds – This type of international mutual fund concentrates on equities of companies in rapidly growing foreign (to U.S. investors) markets. These have the potential for tremendous growth (the 5-year Lipper average for emerging market funds is around a 200% return), but investing in overseas or Latin American markets can be risky.

Other mutual fund terms to know -
Expense ratio – How much of your money is used to pay the fund's management and administrative fees. An average is between 1% - 2%. These expenses can have a dramatic impact on long term investment returns, so choose carefully.

Load - A fee paid to purchase shares in a mutual fund. Not all funds charge loads. 

A mutual fund is simply fund comprised of a group of stocks managed by someone who knows more than you do about the economy, money management, and certain industries. They're easy to buy and a good way to get into investing for the average person. You can include mutual fund shares in most retirement programs. They are, in fact, a favored vehicle for retirement accounts such as 401k plans and IRAs.