Can someone explain what a Mutual Fund is please? And are they good investments?

Answer 1

For all practical purposes, when you invest your money in a mutual fund you are giving it to someone else (a professional) to manage.
There are several different types of funds: one type of fund is known as an index fund. These funds aim to pick the best stocks from a given area of the market (e.g. Tech stocks). Some invest only in a given sector or industry (i.e. sector funds).

Other funds invest mostly in a certain type of capitalization. Low-cap funds usually aim for higher returns, but carry more risk. High-cap funds aim for lower returns but are usually more stable.

Foreign funds invest in stocks from other exchanges around the world (the most popular ones right now tend to trade off China or Japan).

Bond funds invest exclusively in bonds. They tend to provide low returns with little risk.

Monetary funds offer very small returns (usually less than 4% annualized) but almost no risk.

It is worth noting that a mutual fund's performance is measured with respect to a benchmark (an index of some sort). So a diversified US market fund's return would be compared to the S&P 500. A performance consistently better than the benchmark is considered a good track record. This means that if the S&P declined 10% in one year and the fund only declined 5%, it would be considered a good performance even if you lost money!

Determining whether a mutual fund is a good investment depends on many things. One would be how much risk you can tolerate. If you are looking for a conservative investment strategy, European market funds would be a better option than Asian market, for example, and high-cap better than low-cap. It also depends on whether you think a particular sector is poised to go up. If you thought gold prices were going to continue rising, for example, you might invest in mutual funds related to gold (gold mining companies, etc.)

Also note than your investment strategy may also differ based on whether you plan to make one large down investment or regular monthly investments (dollar-cost-averaging). Dollar-cost-averaging can provide higher risk-adjusted returns if the fund you purchase flip-flops around but can produce lower returns if the fund moves consistently up.

Morningstar's website (www.morningstar.com) includes a free fund screener which I find very helpful in determining which funds offer the best risk-adjusted returns.

Answer 2

After reading the previous responses, I have a couple of additional comments.

70% of mutual funds underperform the market in general. The reason for that is that they have high expense ratios, they tend to churn their holdings, and many are of mammoth size. They are the market.

As a result, several years ago, a new type of fund was invented--the index fund. The idea was that if you can not beat the indexes, join them. These funds attempt to match the market indexes. They do this by keeping there expenses low and not churning their holdings. Many of these funds are exchange traded. That means you can buy and sell them at any time, not just at the days closing price. And there are a lot of them, tracking almost every conceivable index imaginable.

There are also funds called closed end funds. They are mutual funds that trade like stocks. They have some advantages and some disadvantages over open ended mutual funds. One advantage is that there is only a fixed amoun to capital in the fund, therefore they are somewhat easier to manage. Another advantage is that they are pretty much ignored by investors and many trade at a healthy discount to net assets, as much as 15%. This might be considered a disadvantage, but there is some satisfaction in being able to buy MSFT at a 15% discount. Another advantager or disadvantage depending on your point of view is that many are leveraged by short term preferred stock.

As I stated intially, 70% underperform the market. But among the other 30% are some fantastic performers. Those are the ones that you should consider as possible investment vehicles. Yahoo finance has good tools to help separate the wheat from the chaff. And Forbes also.

Answer 3

Mutual fund is an investment tool whereby several people come together and inevest in stocks and bonds as per their choice. The problem with an individual investor is that he does not have enought time or information to do a good job of investments, particularly in those types of investments which require constant monitoring.

So an asset management co floats a fund and thousands of people invest in this fund. The asset mgt co charges a fee for the job of managing the fund. The results of the same are published daily in the newspapers.

MFs are an excellent tool for investment for an individual investor. U have a choice of funds that invest in share, or bonds, or govt gilts. U choose funds as per yr risk appetite.

Answer 4

Mutual funds take money from a number of investors, pool it together, and use that money to buy a variety of different securities.

And that's the benefit, it's not invested in just one thing, but a variety of things, which spreads out the risk. And because most funds have a professional portfolio manager overseeing it, you don't have to worry about what to buy and sell because that "expert" does it for you.

So, for a relatively low invesment ($250 to 1500 to start), you're getting professional management and investment variety.

To check out which fund to choose, I would suggest looking at Morningstart Reports, which rates funds and gives a nice overview of their purpose and performance history.

Answer 5

I think they are great. Instead of investing all your money in just one stock or a few individual stocks you invest in a group of stocks. I think it is less risky in just buying stocks. My old business prof agrees.

The person who watches the group is called the fund manager. He buys and sells stocks within the funds to maximize your profits.

Answer 6

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