What do I need to know about investing in mutual funds?

Question

Threw $3,000 into a mutal fund with my bank but I started thinking about complicated this might actually be. What do I need to know about investing like this? And how much harder is it going to be for me when it comes time to file my taxes?

I know so little about this subject that I am unable to choose a best answer. Please vote appropriately.

Answer 1

it only costs you if the bank charges you a fee, and you SELL some of the funds. Then, you'd pay capital gains on the profit.

Answer 2

It's not that complicated. Depending on what kind of mutual fund you have, and how well it does, you might receive "distributions" at some point during the year (often December and sometimes one or more other times also). Those will be taxable as either ordinary income or capital gains depending on how the fund made the money. But don't worry much about taxes. The fund will send you a 1099 form in January that tells you exactly what the numbers are and what type of income they are...and most that I have include a brochure explaining where the numbers go on the tax form, so the tax part really isn't complicated.

If you are reinvesting the distributions, you need to make sure to save your statements showing how much you reinvested (so you don't pay tax on that money again when you eventually sell the fund). Many funds will keep years worth of statements for you online though, so this isn't much of a burden either.

If you invested in a broad-based stock mutual fund (e.g. one that tracks the S&P 500 or Russelll 2000 or some other broad-based index), didn't have to pay a "load" fee, and this is money you don't need for at least a few years - my personal opinion is that you've made a good choice. Historically, stocks have outperformed all other investment classes over long periods of time. The market's pretty choppy right now, but it's highly likely that it will eventually settle down and be nicely higher a few years out no matter what happens in the next few months.

I wouldn't have bought the fund through a bank. I'm sure they're taking a fee out somewhere on top of the fee the fund manager is taking. I'd rather invest directly with the fund company (Fidelity, Vanguard, American Century, T. Rowe Price, etc.). Their expense ratio is usually pretty low, which means you get more of the profits.

If you bought a specialized fund (e.g. a gold fund, a Brazil fund, a biotech fund), then you have more risk than you would with a broad-based fund. Any one industry or country can have an extended period of bad times, which is why I always prefer to have my money spread across many industries.

Oh, and about that second answer with funds not allowing you to withdraw money...those are high-risk funds that were trying to make huge profits quickly by investing in high-risk things like subprime mortgages, "junk" bonds, etc. That's a dangerous game that can be highly profitable for awhile, but devastating when the house of cards collapses. I'd be very surprised if any normal mainstream mutual funds have to shut down, so don't worry about that (unless you bought one of the high-risk funds trying to get rich fast).

Answer 3

Investing in a mutual fund does not have any tax implications until you sell, and only if you sale at a profit (called a capital gain).

The things to look for in a mutual fund are things such as the load, which is the charge that you get when you buy into or sale out of a mutual fund. Some charge a load at the first (front-end load) or when you exit (back-end load). Another important thing to look for is the expense ratio which is what you are being charge on an annual basis for the managers to manage your money. Depending on the fund the expense ratio is USUALLY less than 1%. This is important because you have to pay it whether your investment goes up or down.

Mutual funds are a great way to go if you don't know much about the stock market, don't have time to manage your stocks, or simply want to diversify.

Good Luck!

Answer 4

There is generally an index that is used to track the mutual funds by people that grade mutual funds. The most common index used in the industry is the SP 500. You should see how well that mutual fund has performed against the SP 500. Only 20% beat the SP 500 with most charging you more to track the SP 500 index. You can just buy into the SP 500 index if it's just the ETF SPY.

A hidden fee (you will never see this on your statement, but it affects the performance) is that the holder pay taxes on the sellers. This doesn't happen with ETFs.

When you give money to somebody to run, they have your money. Really, it's theirs unless you sue to get it back if they don't give it back. It can get very nasty. During the dot com melt down, some well known mutual companies in the States were ripping off people in Australia trying to get the money back. It got so bad that brokers there were forging names to get margins (loans in stock speak) that they couldn't pay back. For instance one guy put in $10,000 and found out he had to pay the loan company $100,000 because the broker forged his signature and then lost the money churning (buying and selling over and over again quickly). The brokers would also not release the money. It took 4 years in court for people to start to get their money back.

Answer 5

what you need to know first and fore most, that in a longterm bull market, any idiot can look like a genius, and second, when the market turns sour, like it is beginning to do now, they just freeze your account until the market stabilizes, which may be another 1000points south from where we are now, don't believe this, then call bear sterns or bank pariba, they just did exactly that, and others will soon follow suit.

Answer 6

Are people like "disboy" allowed to tout their revolting trade, free of charge, in these pages?