Cents and Sensibility
Cents and Sensibility
Question: What is a mutual fund? Diversification is key
benefit of mutual fundsAnswer: It's a fund operated by an investment company that raises money from shareholders and invests it in stocks, bonds and other securities. The fund uses dividends and earnings from these investments to pay dividends to its shareholders.
Simply put, when you invest in a mutual fund, your money is pooled with other money and invested in various investments such as stocks and bonds. Mutual funds allow investors with even relatively small sums of money to participate in the financial markets. Today, there are more than 11,000 funds and they collectively represent $5 trillion in assets.
One of the main benefits of investing in mutual funds is the diversification they provide. Funds typically own 100 or more different investments. Although diversification reduces risk by spreading it across a number of investments, it does not eliminate risk completely.
The performance of the investments held by the mutual fund will cause the market value of the fund to fluctuate. Because of this, the share price of the fund is calculated daily. A fund must redeem its shares on any business day. That means you can sell your shares at any time, but the price you receive for those shares will be the current market price, which could be more or less than your original investment.
Q: What's the difference between load and no-load mutual funds?
A: A load mutual fund charges an up-front sales fee, or load, when you buy it. A portion of the sales charge goes to the broker/dealer who represents the fund. For that fee, he or she explains the fund and is obligated to see it meets your objectives. This one-time charge also obligates the broker/dealer to continue servicing your account for as long as you own the fund.
No-load funds do not charge up-front sales fees. They can be purchased directly from the fund company with no assistance whatsoever. Although no-load funds charge no sales fee up front, they still have costs that are passed along to investors. Unfortunately, these ongoing annual expenses are often higher than the fee charged on a load fund.
Guy Steele is a financial planner and head
of the Pali Palms office of Edward Jones. Send
planning and investing questions to him at 970
N. Kalaheo Ave., Suite C-210, Kailua, HI, 96734,
or by email at: gsteele2@pixi.com