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What You Need to Begin Investing in Mutual Funds Mutual fund investing requires minimum investments anywhere from a few hundred dollars to a few thousand. This allows investors to build a diversified strong portfolio much more cheaply than they could otherwise on their own. If you are interested in investing in mutual funds, then you should know what a mutual fund is and what it does. A mutual fund pools money from investors in order to construct a portfolio consisting of stocks and bonds, real estate, and other securities. Each investor participating in the fund gets a portion. Most mutual funds are actively managed, meaning that the shareholders investing in the mutual funds pay a mutual fund manager to actively buy stocks and bonds and sell stocks and bonds as well. There are many advantages and disadvantages to investing in mutual funds. One advantage is that mutual funds provides instant holding of several different companies. This leads to portfolio diversification. Another advantage is that mutual funds are very liquid, like individual stocks, mutual funds can converted into cash as requested by the investor. Some disadvantages to investing in mutual funds include the fact that many mutual funds specialize in burying their costs and in hiring salesmen who do not make those costs clear to the clients they are servicing. Another disadvantage is sad but true in that the average mutual fund manager is no better at picking stocks than the average non-professional investor, but will charge fees as though they are. There is also the dilution when investing in mutual funds, that a great performance by a mutual fund will reap great rewards. The truth is that mutual funds typically have such small holdings of so many different stock that is doesn’t make much of a difference in relation to a mutual fund’s total performance. When investing in mutual funds it is important to look at more than just the past performance of the funds. There are other factors to consider that are listed below. • It is important to consider the size and the age of the fund. Be sure to read the prospectus and perform stock research. Mutual funds that are new or that are small will often have excellent short-term performance records. It is important to keep an eye on these when investing in mutual funds as they grow larger. It may not sustain its results due to pattern mentioned above, because as funds grow in size and increase the number of stocks, each stock will potentially have less impact on the funds performance. • When investing in mutual funds it is important to know how the fund will impact your tax bill. The law requires a fund to make a capital gains distribution to shareholders if it sells a security for a profit that cannot be offset by a loss. You will own taxes on a capital gains distribution from a fund, even if the fund had a negative return on investment. • Be sure to pay attention to the fund’s portfolio turnover rate when investing in mutual funds. This measures the frequency in which it buys and sells securities. If the fund rapidly buys and sells securities it may generate higher trading costs and capital gains taxes. Online Stock Market Reviews presented live via the internet by Stephen Bigalow |
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