There have been many headlines in the news lately about funds. Usually it tends to be a story about a fund manager taking off with his investors’ money. This of course happens, but is not the norm. The funds you see on the news are typically small, privately managed funds. The funds we will discuss here are the larger, bank or broker operated funds. A fund, simply defined is a mutual fund primarily invested in the stock market. A fund differs from a normal stock purchase in that it is a special type of company that pools investors together and invests on behalf of the group. The investments are made based on a set state of objectives and must always be adhered to.
Mutual funds make money by selling off shares from the fund to the public. In this way they are very much like a typical company who sells it’s to the public in the form of stock. Funds then take the capital from their sold shares, and add in the capital gains from their held investments. This accumulated money is then used to purchase more stocks and bonds as investments. In exchange for your purchased share in the fund, the investor receives an equity position in the fund. The given price of a mutual fund share will change on a daily basis; increasing or dropping in congruity with the stocks and bonds held by the fund. A fund shareholder is usually free to sell as they wish.
Video: What is a Mutual Fund?
The Advantages to Investing in Funds
Funds may seem a little complicated to understand at first. Many new investors do not see the benefit in letting someone else choose their investments for them. There are however many significant benefits to investing in a fund:
Customized Funds:
There are literally hundreds of funds out there to choose from. Whether you wish to be more even across the board with investments in many industries and areas of the market or divested solely in a certain sector, like technology or bio-tech, there is most likely a fund tailored to your desire. Liquidity: A significant advantage to a fund is your ability to get at your investment quickly should you need it for whatever reason. Unlike CDs or other investment options, you can sell your share when you need to for very low or no depreciation.
Diversification:
Probably the most important and significant benefit to a fund, diversity of your investment. Unlike investing in one stock from one company, your mutual fund is investing in a host of companies at once. If one company should take a financial tumble, the fund will not suffer much loss, whereas if, that same tumbling stock was your main and sole investment, you could lose a lot of money.
Low Start-Up Minimums:
Many funds will let you buy into them with only $1,000-$2,000 making them affordable to the average investor.
Regulation from the Feds:
Funds are regulated by the Federal Government, more specifically by the SEC (Securities and Exchange Commission). Under the Investment Company act of 1940, funds must register with the SEC and comply with internal operation and investment guidelines. While this does not guarantee your investment, it does make it safer with government oversight of your fund’s operations.
Video: Trading Dictionary – Mutual Funds
Major Funds and Their Performance
There are many, many funds out there today. We will use three well known funds as an example of their performance over the years.
Vanguard:
A fund that is known for its stability and diversification. It is invested heavily in secure assets such as government bonds. Vanguard has many different funds available. Its main fund, Admiral Treasury Money Market (VUSXX), is rated the lowest by experts for risk in investing.
If you invested $10,000 in this fund in 1999 your investment would now have reached $14,000 or a 40% increase in just 10 years.
Janus:
Holds many funds also. It is one of the oldest fund holders in the business, with the Janus Fund (JANSX) having been around for 35 years alone. It is known as a good short and mid-term fund.
If you invested $10,000 in this fund in 1999 your investment would now have reached $11,500 or a 15% increase. That same investment though, over 5 years from 2004-2009 would have increased to $15,000 or 50% increase.
Fidelity:
Another large fund manager and has many options to let you invest in nearly any market area you desire. They also hold the honors of having the most 4 & 5 star ranked funds. Take their industry leading fund, Select Insurance Portfolio (FSPCX), for this example. A 4 star rated fund.
If you invested $10,000 in this fund in 1998 your investment would now have reached $25,000 in 2008, an astounding 250% increase in value.
