Mutual funds basics

Mutual funds are pools of money, invested by individuals, which are professionally managed by fund managers. The money the fund amasses is invested in stocks, bonds and other short term money instruments.

A fund will list its weighting and may typically look like this;

UK Stocks 60%
US Growth Stocks 25%
Latin American Growth Stocks 13%
Cash 2%

There are two types of mutual funds – load funds and no-load funds. A load is basically a sales fee that generally goes to the broker and is usually about 5%. There is not really any good reason to choose a fund with a load – it’s just an extra expense, but you should always weigh all expenses and factors and particularly look at the track record for the fund over time and make sure it is consistent with your investment goals.

Mutual funds generally charge an annual fee to cover the expenses to manage the fund. These management fees are usually about 1%.

Many funds will also charge a fee to enter the fund, called a Purchase Fee, and many charge a Redemption Fee for taking money out. Purchase fees are typically about 3% and redemption fees are no more than 2%. This is so people do not keep taking their money in and out, thus leaving the fund manager with a steady cash balance to trade with and also to reduce cost for the fund.

Mutual funds exist because many investors do not wish to research and choose their own shares and instead trust professional fund managers to invest their money wisely.

Mutual funds offer an individual a long term investment opportunity and some mutual funds have soared over 300% in 5 years! The best website on the internet for information on mutual funds is Morningstar. By registering for free, they allow you to quickly sift through hundreds of funds, with the user able to sort the funds by manager experience, years active, entrance fees, 3yr gain, 5yr gain etc.