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| The Basics of
Mutual Funds: The Feeling's Mutual |
| Deciding how to
invest the money you're contributing to your retirement plan usually means choosing which mutual funds you
want to invest in. |
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| A mutual fund is sort of like an
investment club. It brings together a group of people
who want to invest but who either don't have the time to do all the research needed to build a diversified portfolio of individual stocks and bonds,
or who want a professional to choose investments
for them. The mutual fund gathers all of these investors'
money into one big pot and turns it over to a portfolio
manager, who then decides where to invest the money. That manager's actions are guided by the investment objectives outlined in the fund's prospectus. |
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| When you invest in a mutual fund,
you're actually buying a small portion, or share,
of everything that fund owns. The price you pay
for one share of a fund is called its net asset
value, or NAV. A fund's NAV is always equal to how
much its investments are worth divided by how many
shares of the fund there are. When a fund's investments
do well, its NAV goes up, and you make money. If
the investments do poorly, the NAV falls, and you
lose money. |
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| One key advantage of a mutual fund is that it can be less volatile than holding a few individual stocks. The flipside is that fund returns can be muted relative to individual stock performance. In addition, mutual funds can be more expensive to invest in because you are paying a professional to manage the fund. |
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