A mutual fund is, in essence, a pool of money from several investors that is managed by a professional money manager or "Fund Manager" for a fee. Granted, that's a simplistic description for a complex type of security but from an investor's perspective, it's a pretty accurate definition.
By investing in mutual funds, you can put expert money managers to work to help you achieve your financial goals, whether you're saving for retirement, planning for your children's education or saving for any special need. Here are some guides for you to understand:
Choose Your Fund Strategy
There are a myriad of strategies, but we wanted to at least touch on the major ones in this introduction; Growth Investing, Value Investing, Income Investing, International Investing, Hedge Fund Investing, or a combination. In addition to these strategies you will often see something in the title of a mutual fund that further defines the area they invest in such as "Small Cap Growth".
Exchange Traded Fund or Traditional Fund
Next you will need to decide between a Traditional Fund or an Exchange Traded Fund or ETF. A traditional fund doesn't allow investors to buy and sell quite the same way as you would buy a stock. All traditional mutual fund orders are processed at 4PM EST; you can't trade these types of funds more than once during a single day. The other option is the Exchange Traded Fund (ETF) which trades exactly like a stock; you can buy and sell them whenever you want throughout the day. Choosing really depends on your personal preferences
Check the Expenses and Fees Before You Buy
The next subject is important, Mutual Fund Expenses and Fees. There are several types of fees that you need to be aware of and they are Loads, Redemption Fees, Transaction Fees, and 12b-1 Fees. Whoa, that seems like a lot to remember, right? Well here's a simple fact that will help you remember which fees to pay and which to try to avoid. Every fee is optional! That's right, the funds decide what fees they're going to try to get away with charging, and so can you guess which ones you should pay? None, you don't have to pay anything.
Check Fund Manager Tenure
The last thing to check is Fund Manager Tenure, which is how long the fund manager has been managing the fund. For example, if you were about to buy a fund that performed amazingly over the last 10 years but then found out they just replaced the fund manager 3 weeks ago, shouldn't that change your mind? If, on the other hand, a fund manager has outperformed his competitors and the index over periods as long as 20, 15 or even 10 years, we're impressed. That's a very long window of time and we feel it proves the value of his expertise. Well there you have the mutual fund guide. We sure hope you get the best choice in where you put your money...