Mutual funds are among the most democratic of investments. Why? Because through a mutual fund, nearly anyone with a relatively small amount of money can invest in a number of securities with just one simple purchase. You would need to purchase individual securities at a far greater expense in order to achieve the same type of diversification that mutual funds allow you.
When you invest in a mutual fund, your money is pooled with other people’s money to buy from a variety of securities such as stocks, bonds and money market instruments. Your ownership in a mutual fund, represented by shares, is always proportionate to the amount you have invested.
The market value of a single mutual fund share is called its net asset value (NAV). NAV is determined by adding up the value of all the fund’s holdings and dividing by the total number of shares outstanding. When you look up the NAV of mutual funds, you may actually see two prices. The first NAV is the price you would have received if you had sold shares in that fund the previous day. The second price, called the public offering price (POP), is what you would have paid to purchase shares in that fund. The difference between the NAV and the POP is the load, or sales charge, you would pay to buy the shares.
There are many types of mutual funds available with differing objectives, but they generally fall into these four basic types: stock funds, bond funds, balanced funds and money market funds.
Stock Funds—invest in stocks of public companies, generally with capital appreciation as the primary objective.
Bond Funds—invest in corporate, government and municipal bonds, generally with current income as the primary objective.
Balanced Funds—invest assets among stocks, bonds and money market instruments depending on current market conditions, with a combination of both current income and capital appreciation as an objective.
Money Market Funds—invest in highly liquid securities, generally with preservation of principal, liquidity, and current income as an objective. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money.
Compared with ownership of a single security, mutual funds offer a number of advantages, including professional management, diversification, low cost, liquidity and easy record keeping.
When purchasing a mutual fund, a full-time, professional money manager manages the fund. Mutual fund managers determine the specific securities purchased or sold for your mutual fund, the timing of these transactions and the proportion of asset types for your fund according to the stated objectives of the fund.
An investment in a mutual fund generally includes a number of different securities. Diversification seeks to help reduce the financial risk by investing across different market sectors. If one investment within the fund decreases in value, another investment in the portfolio may not be affected.
Mutual fund investing is more affordable compared to investing in individual stocks because initial investments in most funds can be less expensive.
It's easy to withdraw some or all of the money you’ve invested at NAV. With just a phone call, you can make a withdrawal from your mutual fund, transfer assets from one fund to another, or arrange to set up an automatic investment plan. These transfers may generate a tax consequence and sales charges when selling shares.
Your mutual fund company will send you periodic statements, annual reports and tax-related information. In other words, the mutual fund company does much of your investment paperwork for you.
Understanding how a mutual fund works can help you navigate through the many options and choose the fund(s) that best meet your individual financial needs.
Before you buy shares in a particular mutual fund, speak with a financial consultant, read the fund's prospectus, and evaluate the following aspects:
The Investment Objective - Be sure the mutual fund's objective matches your financial needs.
Risk - The mutual fund's prospectus will describe the principal risks associated with investing in the fund.
Performance - Look at the mutual fund’s historic returns—both positive and negative.
Fees - Know the costs associated with investing in a particular mutual fund.
Policies and Services - Be aware of the mutual fund’s minimum balance requirements, telephone privileges and online account access.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not ensure against market risk.
Golden 1 Financial Consultants1 are experienced in helping you determine what your long-term investment objectives may be, what your level of risk tolerance is, and what types of investments are most appropriate to help you achieve your goals. Take the time to discuss your goals with your financial consultant to help you make the right decisions for your individual financial needs. Ask a Golden 1 Financial Consultant how they can help you:
Schedule a free consultation with a Golden 1 Financial Consultant by calling 1-877-GOLDEN 1 (1-877-465-3361).
1 The Financial Consultants of Golden 1 Investment Services are registered representatives with LPL Financial. Securities offered through LPL Financial, Member FINRA/SIPC. Insurance products offered through LPL Financial or its licensed affiliates. LPL Financial is a Registered Investment Advisor. LPL Financial is not affiliated with Golden 1 Credit Union nor Golden 1 Investment Services.
The LPL Financial registered representative associated with this site may discuss and/or transact securities business with residents of all 50 states.
2 You are advised to seek advice from your own tax professional and attorney.
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