Mutual funds are investment companies that take in funds from many individuals, commingle the money, and a portfolio of stocks (or bonds or other investments) that they manage. Mutual funds provide a way for investors with limited dollars - many mutual funds have minimum investments of $2,500 or less - to have portfolio diversification as well as professional money management.
Investors can purchase mutual funds through a broker or directly with the fund family. "No-load" funds are sold to investors without a broker and without an up-front sales fee.To join most no-load funds, you call the fund family directly via a toll-free number, and the fund group sends you the necessary enrollment information and fund prospectus. The prospectus explains the details of the fund - fees, management styles, and so on. "Load" funds carry a sales fee, which can range from as little as one percent of your investment to five percent or more of your investment, and are usually sold by brokers. All mutual funds have annual management fees, which are paid to the investment company for managing the portfolio. These fees can vary dramatically from as low as 0.25 percent of a fund's assets to two percent or more a year.
Investors buy and sell shares in the fund at the "net asset value." This is the total of the fund's assets minus any liabilities. Many mutual funds list their net asset values daily in The Wall Street Journal.
Most investment advisers believe that mutual funds represent the only way individual investors should venture into the markets. The professional management and "instant" portfolio diversification afforded by funds are two huge benefits that are tough for individual investors to replicate on their own.
How should you choose a mutual fund? One point I'll make here is that, all things being equal, funds with the lowest expenses make the best investments. Thus, investors should focus on no-load funds with low annual expenses.
Many mutual funds allow investors to get started with minimal amounts of money if the investor agrees to automatic monthly investments via electronic debit of a bank account. You should also note that many mutual fund families lower the minimum initial investment if you are opening an IRA.
