How do mutual funds work?

Answer 1

You select a good Mutual Fund (MF) family, read the prospectus and fill out the application and send in or drop off your check for the minimum required purchase.

Some MF are no load and others have load or percentage they charge upfront (and some on redeeming/selling shares as well). Normally the day the MF family processes your application and your check clears?, one would get so many shares x Net Asset Value (NAV) shown in the business section of major newspapers. Any difference between # shares x Closing Price = Check would most likely be part of the load/commission.

The NAV asking price fluctuates with the stock market bec the Fund Manager buys so many shares based on the incoming cash from other investors...so you always want to remember the NAV on the day you purchase your shares to determine whether you're ahead or behind. In the long run, if you go the the traditional MF winners, 20 years from now it is possible to deposit $1,000 and with dividends being reinvested and no withdrawals to see the TOTAL VALUE climb like to $10,000 to $20,000.

Most MFs will distribute $$$ dividends to shareholders on certain dates and with each distribution, if you elected the PREFERRED REINVESTMENT, the MF family will convert the $$ dividends into more shares for which they will send you Form 1099 which you must list on Schedule B as dividend income and pay the appropriate taxes.

Then you must remember your CUMLATIVE TOTAL SHAREs = Original & any Add'l Shares purchased + Shares You Received as Dividend Reinvestment

Answer 2

As the mutual funds are designed by investment companies to buy shares in different stocks and other securities, the mutual fund investor along with their ownership of shares of the mutual fund, have a restricted claim to ownership on few of the securities held by the mutual fund. Besides mutual funds provide the dual advantages of diversification and professional money management services to manage the money invested in the fund.

Shareholders can buy more shares or sell the shares they own whenever they wish. But these transactions should be carried out carefully since the prices of the shares vary daily and can significantly affect your profits.

Answer 3

Hi Hope,

A Mutual Fund is basically just a large group of people putting their money together and investing in a bunch of companies (buying stock). The fund managers decide when to buy and sell and you pay them for their "expertise" in selecting stocks (you pay when you buy the fund, sell the fund, and / or every year)

Much like the stocks themselves, the value of mutual funds fluctuate over time.

Studies have shown that once you factor in the MER's (costs you pay the fund managers - management expense ratio) the vast majority of mutual funds UNDER-PERFORM the market.

What this means is, if you instead bought an index fund (like a MER but it buys and sells stock automatically according to different formulas) you would earn more money then if you bought a mutual fund.

Index funds aren't publicized much (because people can't make much money selling them to you), but are in my opinion the best investment for beginning investors.

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Answer 6

Your question is kind of vague. I could write for hours answering it, and I may not give you what you need. Can you please read this Wikipedia entry and then ask a more specific question:

http://en.wikipedia.org/wiki/Mutual_fund