(Prosperity)
Define: Mutual Funds
Does your blood pressure rise every time the Sam Waterstone ad for Toronto Dominion’s Ameritrade brokerage comes on TV? Not just because he’s cute in a super-secure, what’s wrong with father issues kind of way, but because of the pressure to trade, day trade, right now?
Never fear, Mutual Funds are here. In a Mighty Mouse meets Courageous Cat super-heroic kind of way, mutual funds allow you to benefit from the experience of all those professionals out there who invest for a living. Ok, yes, these professionals aren’t doing anything for free and take their share out along the way, but something in the bank is better than nothing. Or after listening to Sam, no matter how logical he sounds, investing and losing in your spare time.
The US Securities and Exchange Commission defines a mutual fund as “a company that brings together money from many people and invests it in stocks, bonds or other assets."
Usually these cash pools are invested according to a stated objective, as defined by the fund's prospectus (defined in sidebar). When you buy a mutual fund, your assets are shares in the fund, not ownership of the underlying securities the fund buys to make your money grow.
So, mutual funds are shares in a cash pool which in turn owns a portfolio (hopefully diverse) of stocks, bonds and perhaps money market securities and even derivatives, depending on the fund's objective. All funds charge management fees and may charge other dues and expenses (factors which determine the fund's expense ratio). These costs, plus the trading costs, are deducted from your return.
Your total return on a fund is determined by its Net Asset Value. That’s the value of a fund’s total assets - both the worth of the portfolio (V) and any money waiting to be invested (M), less any liabilities (OE) - like operating expenses, divided by the number of outstanding shares (OS). The NAV is the amount of money that investors would receive if the mutual fund sold all of its assets, paid off all of its outstanding debts, and distributed the proceeds to shareholders. Your own NAV is equal to the NAV of each share of the fund outstanding, multiplied by the number of shares you own So as a formula it’s the first three in parenthesis (V+M-OE) divided by OS.
The benefits of mutual funds are: professional management (hey, you wouldn’t cut your own hair after reading all the about.com articles about hair cutting, would you?), diverse holdings and matching an objective to your values and business practices. For more on that, check out Socially Responsible Investing.
Mutual Funds and Some of Their Options->