|
Mutual funds are very popular. In fact, they are the one of the most
popular investments on the market today. What does that mean in
numbers? There are over 10,000 different funds with over $4 trillion in
investments!!
Why are they so popular? For some, it is because of their great
returns. Others like funds because they are easy to buy and sell. Still
others like them because they are diversified and less risky.
A mutual fund raises money from investors to invest in stocks, bonds,
and other securities. It is a package made up of several individual
investments. When those investments gain or lose value, you gain or
lose as well. When they pay dividends, you get a share of them. Mutual
funds also offer professional management and diversification. They do
much of your investing work for you.
Mutual funds have been around since the 1800's, but didn't become what
we know today until 1924. Even then, they did not become a household
word until the 1990's, at which time the number of people owning them
tripled. A recent survey shows that 88% of all investors have at least
some of their money in mutual funds.
A mutual fund is a special type of company that pools together money
from many investors and invests it on behalf of the group, in
accordance with a stated set of objectives. Mutual funds raise the
money by selling shares of the fund to the public, much like any other
company can sell stock in itself to the public. Funds then take the
money they receive from the sale of their shares (along with any money
made from previous investments) and use it to purchase various
investment vehicles, such as stocks, bonds, and money market
instruments.
In return for the money they give to the fund when purchasing shares,
shareholders receive an equity position in the fund and, in effect, in
each of its underlying securities. For most mutual funds, shareholders
are free to sell their shares at any time, although the price of a
share in a mutual fund will fluctuate daily, depending upon the
performance of the securities held by the fund.
Most investors pick mutual funds based on recent fund performance, the
suggestion of a friend, and/or the praise bestowed on them by a
financial magazine or fund-rating agency. While using these methods can
lead one to selecting a quality fund, they can also lead you in the
wrong direction and wondering what happened to that "great pick."
Despite the distinctive characteristics of mutual funds - performance,
management philosophy, & investment objectives - your specific
selections should be chosen within the context of your overall
financial plan. Examining features such as past performance are not
where your studies should begin. The point of departure is you; your
financial priorities; your resources; your approach to investment
diversification; your willingness (or lack thereof) to accept market
volatility; and your time horizon for a particular investment.
Total Returns are fun to look at and brag about, but simply looking at
a fund's total return for the past year is not necessarily a good
measure of a fund's quality. For example, investors often talk about
how well a specific fund did last year and how happy they are with that
performance -- say a 16% return in an equity income fund. Well, in a
given year that may or may not have been a good return for an equity
income fund. That fund may have under-performed many or most other
equity-income funds for the year. Returns should always be measured in
context with how other similar "categorized" (e.g.. equity income
funds, growth funds, small cap funds, etc.) funds have performed. So
don't get overly excited by a funds total return until you see how it
compares to other similar funds over the same period.
As it is often said, past performance can't predict future results. But
when comparing performance of funds, it is also wise to look beyond the
results of one or two years. Most experts suggest that a larger
"window" of 5 to 10 years gives a clearer picture of historical
performance. Has your fund or the one you are considering performed
well over this longer time horizon? Any fund can have one good or one
bad year, but if you are investing for the long term, you want a fund
that has a consistent track record. While that record doesn't guarantee
future results, it gives you an indicator that may be to your advantage.
|