Dollars & Sense: Six things you should know about mutual funds
An estimated 90 million people own mutual funds, a number that has remained steady despite recent market ups and downs. To understand their enduring popularity, consider the following:
1. They come in many varieties. There are thousands of mutual funds available in the marketplace. Each has its own investment approach, which is explained in the prospectus. All you need to do is find the one that meets your particular goals, risk tolerance and objectives.
2. They’re professionally managed. When you invest in a mutual fund, you are hiring a full-time professional money manager to buy, sell and monitor your investments on your behalf. This day-to-day oversight can be valuable, especially during times of market volatility.
3. They provide broad diversification. Most mutual funds hold far more securities in their portfolios than individual investors can typically afford to buy on their own. This level of diversification helps limit the impact that a decline in the value of any one security may have on your overall portfolio performance.
4. They’re easy to track. Mutual funds offer you a spectrum of investments in one fund portfolio. Rather than following multiple individual securities, all you have to do is monitor the fund’s overall performance.
5. They’re affordable. Most mutual funds allow you to buy into a fund with a small minimum investment, often $1,000 or less, making it easy to get started.
6. They offer easy access to your money. You can redeem your shares at their net asset value on any business day. Of course, the amount you receive may be more or less than your initial investment.
What should you look for when selecting or evaluating a fund? While long-term performance is important, several things can impact a fund’s success:
• The fund’s sales charges, fees and expenses. These can add up over time and eat into your returns.
• Its turnover rate. A fund that frequently buys and sells securities may generate higher trading and capital gains costs.
• The volatility of the fund. Generally, the more a fund’s performance bounces up and down from year to year, the greater the investment risk.
Be sure to read the fund’s prospectus before investing. It provides detailed information that can help you decide whether a fund is right for you. Also, speak to a qualified financial representative, who can help you select suitable investments based upon your particular investment objectives, financial circumstances and risk tolerance.
Mike Davis is a Rifle-based financial representative with Northwestern Mutual, the marketing name for The Northwestern Mutual Life Insurance Co., Milwaukee, Wis., and its subsidiaries.
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